Eliminating the shortall

Hi guys,
While Im no property investor, many of my friends are, and quite often I over hear them speak of the shortfall in income with investment properties. As in, the rent not covering expenses such as mortgage repayments, rates and so forth. I have intensions within the future to become involved in property - however I am curious to know how it is possible to continually buy properties when there is this continual shortfall in income?

Obviously if the properties were cashflow positive then buying properties one after the other is no concern, but when theres a definite shortfall, obviously maintaining serviceability - whether it be on the loan itself or maintenance on the property or perhaps something else - how is this acheivable?

I guess I have begun referring to it as "bridging the gap" as in eliminating this shortfall - but how is this done?

After having read Peter Spann's book it seems he was able to do this by investing in shares that offset his IP expenses.

Is this a legitimate way of approaching this? And if so - what sort of figures would you have to invest towards generating an income to do so? And would this income be monthly or yearly or what???

Also, it seems that many highly successful investors began off by selling their properties - as in - quick renovations and selling outright. Surely there must be some truth to this being a consideration.

I guess in summary Im concerned that after having purchased X number of properties that Ill be sitting at home on the weekends eating home brand tuna and dry toast because of this shortfall in cashflow.

How is it possible to continually buy renovate, rent or sell like the big boys?

RJ

anyone at all???

RJ

In my personal opinion, a few things I'm looking to do (not a recommendation for anyone else) include extraction of equity from IP's using a line of credit, borrowing against this line of credit to purchase shares, margin loan against shares to leverage higher (moderate LVR, not real high) and using the share dividends to compensate the shortfall in property expenses. Also, as I am focused on townhouses, purchasing townhouses which have a high level of tax deductibility on fixtures and fittings, building depreciation, etc is one of my criteria. Consequently, then applying to the ATO to have your tax reduced based on an estimated tax return to allow you reclaim more income each fortnight to put into the shortfall.

There are many other ways to approach it through LOC's and Cash Bonds, etc...over to the experts?

Hey mate,
Thanks for replying. Im very interested in learning more about shares and how they can assist in offsetting the shortfall. I wouldnt mind hooking up again some time. Perhaps you can tell me in lamens terms over a cold drink.

RJ

ramone_johnny said:

Hey mate,
Thanks for replying. Im very interested in learning more about shares and how they can assist in offsetting the shortfall. I wouldnt mind hooking up again some time. Perhaps you can tell me in lamens terms over a cold drink.

RJ

Click to expand...

Yes I would be interested in listening to this as well.
Maybe a couple of cold drinks and a chat?
cheers,
Peter

I too have started to filter some of my equity into managed funds to help fund the gap. You'll find plenty of suggestions if you have a quick search on this forum - what I suggest is you look at spreading your money across a few funds and not just throw your money into one.

Once you have reached critical mass you can start supporting the debt via LOC's directly as most property costs can be paid for by borrowed money whilst still claiming the deduction on the interest.

I don't walk the talk yet. I'm sure a few of our experienced forum members can assist you better than I ever could fellas!

Cheeks said:

Once you have reached critical mass you can start supporting the debt via LOC's directly as most property costs can be paid for by borrowed money whilst still claiming the deduction on the interest.

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LOC's? And can you claim the interest on an IP just like a business loan?

RJ

pete152 said:

Yes I would be interested in listening to this as well.
Maybe a couple of cold drinks and a chat?
cheers,
Peter

Click to expand...

Hey Mark,
Could be time for another "get together" mate

RJ

How hungry are you?

RJ,

The simple answer to "how to continually buy renovate, rent or sell like the big boys" is to just do it.

Though, what might seem like continual buying by the big boys might not be as frequent as you think, certainly when their investing began anyway.

Like the big boys, if you're hungry enough you'll find a way.

Best wishes,

Hi RJ,

This is how I fund any shortfall as you put it.

The CGA strategy I've developed utilises a regular purchasing cycle similar to what Dollar Cost Averaging is to the sharemarket. The major underlying principle to its success is it relies on your "time in" the market, NOT "timing" the market, and never never sell. So in other words it does not matter whether you buy at the top of a boom or at the bottom, just so long as you purchase good quality, well located property in high density areas ( metro area capital cities), at or below fair market value, on a regular basis. I've been purchasing IP per year.

I've been purchasing new or near new property over older style property for several reasons, the main ones being (in no particular order) -

1/ To maximise my Non-Cash deductions
2/ To minimise my maintenance & repair costs
3/ More modern & Attractive to tenants - thereby minimising potential
vacancy rates
4/ Ask a higher rent - thereby Maximising yields

Without getting into the "which is better debate, houses or Units??", I preferr to purchase Townhouses & Villas with a 30% or greater land component thereby eliminating multi story units or high rise apartments, for several reasons. The mains ones being (in no particular order) -

1/ lower maintenance & upkeep for the tenant
2/ lower purchase or entry level into a Higher capital growth suburb area
3/ rapidly growing marketplace (starting both now & into the future) wanting these type properties. This is due the largest group of people to ever be born (being the Babyboomers and Empty nesters) starting to come into their retirement years. They will be wanting to downsize for the following main reasons - lifestyle & economic.
4/ greater tax advantages & effectiveness.
5/ able to hold more individual properties spread across your portfolio - thereby minimising area over exposure risks by not holding all your eggs in only a few baskets, so to speak

I look to buy in areas with a historic Cap growth of 7%pa.

Getting back to CGA, as the name suggests it averages out the capital growth achieved on individual properties with your portfolio throughout an entire property cycle, taking into account that property doubles in value every 7 - 10 years. Thats 7%pa compounding.

The easiest way to explain what Im meaning by this is to provide a basic example taking into account that all your portfolio cashflow will be serviced via Rental income, the Tax man, an LOC and/or Cashbond structure.

For ease of calculation lets say we buy a property for $200k, so in 10 years its now worth $400k. Now lets say we do that each year for the next 7-10 years. Now you can quit the rat race.

So in year 11 ( 10 years since your 1st Ip) you have 200K equity in IP1 you can draw out (up to 80%) Tax free to fund your lifestyle or invest with. In year 12 you do exactly the same but instead of drawing it from IP1 you draw it from IP2. In year 13 you do the same to IP3, in year 14 to IP4, etc etc etc.
You systmatically go right through your portfolio year by year until you have redrawn from each property up to year 20.

So what do you do after you get year 20 I hear you say ?? hmmm..well thats where it all falls into a deep hole - You have to go get a JOB nope only joking

You simply go back to that first IP you purchased as its been 10 years since you drew upon it first time around and its now doubled in value so you complete the entire cycle once again. Infact chances are you never drew each property up 80% lvr max , so not only have you got entire property cycle of growth the spend you still have what you left in it first time round that compounded big time. Now you wealth is compounding faster than you can spend it! What a problem to have

Getting back to what I said in my opening paragraph about it does not matter where you buy within a property cycle just so long as you do buy, This is because you will not be wanting to draw upon it until 10 years later after its achieved a complete cycle of growth.

Well thats the Basic Big Picture of CGA. Once its set up its a self perpetuating, equity to TAX FREE cashflow conversion income money machine

Pete said:

RJ,

The simple answer to "how to continually buy renovate, rent or sell like the big boys" is to just do it.

Though, what might seem like continual buying by the big boys might not be as frequent as you think, certainly when their investing began anyway.

Like the big boys, if you're hungry enough you'll find a way.

Best wishes,

Click to expand...

Pete,
In answer to your question. When it comes to wealth creation - I couldnt be hungrier.

RJ

RJ,

This is how a Cashbond works. I use it in conjuction with my CGA post above -

When you have a few IPs under your belt Serviceabilty will eventually become an issue. The banks/lenders will not lend you money due to you not meeting their standard lending criteria. As you know banks/lenders work out seviceability under 2 modules - LVR & DSR.

Where the majority of investors start to reach their borrowing capacities is in relation to the DSR or Debt Service Ratio. In other words not enough cashflow income to service your IP debt. Now this isnt really a problem if you can increase your income. But how can you do that

Obviously there are many ways as the mind can conjure up. But the main ways most investors know of is to increase you PAYG income and/or increase your IP rental income. As these methods are fairly well reliant and restricted to market conditions alot of investors dont know where to go to from there. Alot forget about the store of Equity they have with their low LVR's created over time by past capital growth.

Thats where a Cashbond or Annuity comes into play - which is method I have implimented to get me around the lack of serviceability issues and allowed me to keep borrowing to build my Portfolio.

A cashbond basically works by converting existing equity into cashflow for the purposes for increasing your income in the eyes of the banks/lenders.

The way it works is as follows - you purchase a Cashbond/Annuity or guarranteed income plan from an insurance company. That Insurance company then pays that back to you plus interest over a nominated term - usually 5 years. You purchase the Cashbond using funds with drawn from a LOC.

For example if you purchased a $100,000.00 cashbond over a term of 5 years, each year you would get $20,000 plus interest paid back to you. Now when you go to the bank for a loan to purchase your next property you can show 100% of that $20,000 income on the INCOMES side of your loan application on top of your existing Payg Income & all your other rental incomes...In other words You have effectively increased your borrowing because you have an extra $20,000 income in the eyes of the banks. Pretty neat hay

You can also use that cashbond income to service your portfolio holding costs as well.....this giving you sleep at night factor knowing you can service the debt comfortably.

This how I have been able to keep purchasing. Now I know this method is not for everyone. It all depends on your circumstances, goals, time frames & your individual investor risk profile.

Hope this has provided you & everyone else with some food for thought.

ramone_johnny said:

Hi guys,
While Im no property investor, many of my friends are, and quite often I over hear them speak of the shortfall in income with investment properties. As in, the rent not covering expenses such as mortgage repayments, rates and so forth.

Click to expand...

This is the so called "negative gearing".

ramone_johnny said:

I am curious to know how it is possible to continually buy properties when there is this continual shortfall in income?

Click to expand...

You do hit a serviceability wall.

ramone_johnny said:

I guess I have begun referring to it as "bridging the gap" as in eliminating this shortfall - but how is this done?

Click to expand...

Remember to take into account tax benefits - so you don't actually hit the wall as fast as you think you might.

I guess the most obvious way (for most people) to bridge the gap therefore is......work. The problem with this of course is that if you leave your job, then it may be a problem

We've tackled it (as suggested by those in the previous posts) through:
1. share trading (I call this "self employment")
2. Income producing managed funds
3. Commercial property trusts

There is no one "correct" way.

As to the amount you need to put in, I have posted previously our current portfolio asset allocation
http://www.somersoft.com/forums/showthread.php?t=23692
to give you some idea.

At this point, our portfolio is pretty much cashflow neutral - i.e. the income from the investments = shortfall for cashflow -ve investments.

Will you end up eating tinned tune every night? Depends on your priorities.

At one stage we wanted to grow our portfolio so badly, that we did just about do that (anyway, tuna is supposed to be good for you isn't it?)....

Cheers,

The Y-man

Rixter said:

Hi RJ,

This is how I fund any shortfall as you put it.

The CGA strategy I've developed utilises a regular purchasing cycle similar to what Dollar Cost Averaging is to the sharemarket. The major underlying principle to its success is it relies on your "time in" the market, NOT "timing" the market, and never never sell. So in other words it does not matter whether you buy at the top of a boom or at the bottom, just so long as you purchase good quality, well located property in high density areas ( metro area capital cities), at or below fair market value, on a regular basis. I've been purchasing IP per year....

Click to expand...

Hi Rixter,
Thanks for the comprehensive reply. Although I must ask, how is it that some people make it in 7 years when others take 20 as you suggested?

RJ

ramone_johnny said:

Hey Mark,
Could be time for another "get together" mate

RJ

Click to expand...

I do not know who Mark is but yes a few drinks and discuss these money making ways.
Cheers,
Peter

ramone_johnny said:

Hi Rixter,
Thanks for the comprehensive reply. Although I must ask, how is it that some people make it in 7 years when others take 20 as you suggested?

RJ

Click to expand...

RJ,

Reread the post....it suggests 7-10 years to accumulate 7-10 Ips.

pete152 said:

I do not know who Mark is but yes a few drinks and discuss these money making ways.
Cheers,
Peter

Click to expand...

Mark Laszczuk

RJ

Hi Rixter.

Sounds similar to what the Investors Club suggest.

Have you sat down and worked out what interst repayments would be after a fair while (say 15-20 years)?

Definately not criticising this system, as it sounds very interesting. My only concern is the ever growing interest. I know (in theory) that the I/P's value are supposed to be outgrowing what you are deducting in income from LOC's, but my concern would be somewhere down the line if there had been a lengthy period of little (or no) growth yet the interest repayments are sneaking up every year.

Maybe this fear is holding me back, I admit, or maybe I am a bit too conservative. Just a hurdle I have to get over.

Regards
Marty

Rixter said:

RJ,

Reread the post....it suggests 7-10 years not 20 years.

Click to expand...

Ok I will. Infact Im going to print this out and take it home, so can everyone stop posting so i dont miss anything?

Also 2 more questions Rixter.

1. Is it really still a matter of "who" you know, more than "what" you know when it comes to becoming wealthy in property investing.

AND

2. What are your thoughts on shares as a means to offsetting this shortfall?

Ok 3 - I lied.

What about borrowed money towards cashbonds initially?

RJ