Self Funding property - Qu for Michael Croft

Hi Michael,
In the thread on secrecy you said you had

self supporting "cells" of property that stand alone and self fund and replicate.

Click to expand...

Your strategy sounds really interesting. If it's not asking for too many details (and if you don't want to reply that's cool!) could you give a few more specifics on how you do this.

Do you use a similar structure to Brad Sugar's who buys 5 cashflow =ve properties and one -ve/growth to offset them?

Thanks
Sue

That was 5 cashflow +ve properties to one growth (whcih is -ve cashflow)
Sorry!

Hmmm,

Wonder what the numbers would look like?

Assuming:

Prop #1
Price: $300k
LVR: 90%
Rate: 6%
Rent: 4% Gross Yield ($1000/mo)
1st Mort: $1740/mo

Monthly shortfall (1st mort less rent) = -$700/mo

Using wraps (assume):

Ave price: $90k
LVR: 90%
Net cashflow $50/wk
Cash on Cash Return: 100% 1st year.

Then:

$50 x 52 (weeks) divided by 12 (months) = $215/mo

How many wraps need to support 1 -ve property?

$700 / $215 = 3.25 (4 properties)

How much capital is required to set this up?

Prop #1
5% purchase costs ($300k) = $15,000
10% deposit ($300k) = $30,000
Prop #2-5
5% purchase costs ($90k) = $4,500 x 4 = $18,000
10% deposit ($90k) = $9,000 x 4 = $36,000

TOTAL Outlay = $99,000

Now the theory is, if we assume a cash on cash return of 100% (that is the funds invested in return back in full in the 1st year) then money to acquire the 4 wrapped properties ($54,000) is back in the bank, ready to acquire another -ve property.

The problem here is that these funds are actually used to support the -ve property so they aren't actually available as such. But in theory the capital gains from the -ve property could be used to duplicate the above system.

If this was the case - the system could not be repeated until the negative property increase to a point where the equity was sufficent to draw down an amount to the new "total outlay" figure. This I think would be the goal.

By the way I have a bias for wraps - but any +ve geared property could work.

Please note the above example has been grossly simplified, its only intention is to paint a picture to ponder.

Just a thought
Michael G

Hi Sue,

The cell strategy evolved for assett protection and the number of properties in each cell (holding entity) varies from 3 to 7. The theory being if the entity gets into trouble (eg. tenant falls down stairs becomes quadraplegic, sues, insurance doesn't pay, and entity cops it) we can fold the entity and the rest are OK.

The self funding and replicating strategy is a simple one of; buy well, reno, create multiple income streams (if possible and profitable), access increased value, do it again. The properties are (mostly) in high growth areas and all are cashflow + (sometimes a cell starts out neutral). LVR's are kept below 80% and most are less than 60%. Equity not cash is used to fund the process.

What happens is that with cap growth about 5 properties in a cell means that one will soon be able to be extracated from x-collateralisation to set up a new cell. Sometimes some shuffling of paper is require to get a cell off the ground and an LOC from one cell may be used to fund another BUT their is no x-coll between cells.

That's it in a nut shell and as I've often said, making money in IP's is not rocket science.

regards, MC

Michael thankyou very much. Simple yet very effective strategy.

Originally posted by Michael Croft
What happens is that with cap growth about 5 properties in a cell means that one will soon be able to be extracated from x-collateralisation to set up a new cell. Sometimes some shuffling of paper is require to get a cell off the ground and an LOC from one cell may be used to fund another BUT their is no x-coll between cells.

Click to expand...

Hi Michael,

Good plan and, interestingly, the same one I am working towards now. Funny how the simple ideas work there way to the top.

Just to clarify a couple athings. Once you have enough equity in the 5 properties in a cell you refinance so that 4 properties take on all the debt leaving the 5th unencumbered. Then you get a LOC on this 5th one and use that as deposits for properties in another cell? Is this how you work it?

Hi Michael

If it is not too personal

Do you control each of these cells of investments in your own name or as separate "cell company' , trusts or what?

I refer to your comment that if a disaster strikes, you can fold the cell and not impinge on the others. How do you prevent the disaster from impacting on the rest of your imvestments.

Thanks

Ross

If you have to give personal guarantees to the companys or trusts holding the cells, you cant avoid liability across the whole portfolio. If you dont have to give personal guarantees, youre fine. Well, thats the way i see it.

What id like to know is if someone does fall down the steps and sues and your PL policy for that cell wont pay up, then as you stated you "fold the cell" does that mean the poor quadraplegic will miss out on compensation? If so, nice guy...If not, very smart....


Basically what im asking is if the sructure set up to avoid legal threat to your total portfolio, then where does that leave the tennants who are injured or whatever?
And why wouldnt the insurance company pay up? If you have the correct insurance policy and everythings above board and paid up, should be cool.

A lot of the concepts in your strategy are basic IP investment procedures with fancy names, no?

OK one at a time,

Owen the LOC is often secured by the original cell, it then funds the new cell but there is no legal/official link. It is also done as you suggest but I can't see any benefit. I take what ever is the easiest path at the time.

Ross I chose words carefully and used 'entity' deliberately. I own nothing (not even the PPOR) in my own name anymore. A combination of trusts, companies and other structures are used - seperate legal entities.

Brains why would anyone be so stupid as to give personal guarantees for a separate entity, when the entity (cell) folds you can be found liable which defeats my reason for it's establishment? As for the 'poor quadrapelic' the individual cell would payout it's equity and then you would see your taxes at work. And incidentially why the hell should anyone pay for someone falling down a set of stairs that comply with the BCA? Whatever happened to personal responsibility?

"And why wouldn't the insuarnce company pay up?" Ever had dealings with insurance companies when the payout amounts are in the millions?

As for the basic concepts expressed I agree and I think you missed something - I actually stated that the concepts are basic. The only word that is not IP speak is 'cell' and if you think that is mutton dressed up as lamb may I suggest you change your nom de plume. I use the word cell because it reminds me of the cold war days and communist cells - stand alone self supporting units that if threatened would not compromise the whole. It's also shorter than 'seperate legal entity'.

regards, MC

Hi Brains,

What would happen to the quadriplegic if he had fallen down the stairs of a rental owned by a new investor in a $50,000 house in outer woop woop who financed to 90% and has no other assets? I am sure that Michael takes reasonable steps to ensure the safety of all his houses (I know that you were not suggesting anything else) and protecting himself is prudent. Yes, in our country the property owner can be found liable for damages for injuries occurring on his/her property....the person that falls over can also insure themselves for Total and Permanent Disability. My point is the system that allows people to sue someone else allows the same person to be financially secure if all they wish to do is make someone else pay for their own misfortune.

As far as personal guarentees go, from my understanding the only party that requires this is the bank that is providing the money for the property....and why wouldn't they...I would do the same if I leant you $X to buy something via a sheltered body.

Glenn

"As for the 'poor quadrapelic' the individual cell would payout it's equity and then you would see your taxes at work"

Hi Michael, can you clarify the above?



"And incidentially why the hell should anyone pay for someone falling down a set of stairs that comply with the BCA? Whatever happened to personal responsibility?"

You didnt state this scenario in your original post , but what if a tile is broken or the rail is loose? But it could be any claimable injury, right?



"As for the basic concepts expressed I agree and I think you missed something - I actually stated that the concepts are basic. The only word that is not IP speak is 'cell' and if you think that is mutton dressed up as lamb may I suggest you change your nom de plume. I use the word cell because it reminds me of the cold war days and communist cells - stand alone self supporting units that if threatened would not compromise the whole. It's also shorter than 'seperate legal entity'."

Michael, I dont a lot about you, but one thing i do know you are a great spin doctor

Michael

If you don't mind me asking, how do you satisfy the lender's serviceability requirements when the entity borrowing the funds has little or no income other than the interest.

Does the entity need additional income sources, or is the fact that LVR is 60-80% mean that cashflow is sufficient to satisy the lender that the entity is self supporting?

Sanchez

Hi,

Serviceability is not usually a problem due to the low LVR's and the properties would be positive at 100% finance plus costs (at the time of purchase).

Have a look at Steve Navra's stuff on 'cashbonds' aka annuities for an answer to when seviceability becomes an issue. The LOC is sometimes used this way to get a deal accross the line.

regards, MC

Thanks Michael

That answers my question.

Whereabouts would I find the Steve Navra info re annuities. Is it on his website?

Sanchez

Hi Michael

"Entity". I appreciate the comments and advice. Thanks.

Regards

Ross

Sanchez,

visit Steve's site at www.navarinvest.com.au . I highly recommend you book in to do one of his courses in which Steve goes in to great depth and detail about annuities, structure and strategy.

That should be

http://www.navrainvest.com.au/

Thanks Simon!

Hi Michael

Cogratulations on your success keep it up.

These are excellent posts thanks for the info

Reagards

Hi Brains let's expand the scenario,

Drunken tenant falls down perfectly good steps and sues my 'entity' with which she has a lease for damages (she is now a quadrapelgic).

The court in it's infinite wisdom finds that although the entity's stairs were sound the handrail was only 850mm high, the current standard requires the handrail to be 1000mm high. Although the handrail complied at the time of construction, due to some convoluted legal meanderings my entity is found liable for not upgrading the handrail when I did a reno (this is getting scary!).

The court awards against my entity and it is ordered to pay $12,000,000 in damages plus costs. At some stage my insurer bails due to a technicality (the handrail), my entity folds and pays out it's equity after its been sold by the liquidator. The former tenant is still short some $12,000,000 (the admin and legal fees are a killer and the administrators and lawyers always get paid first).

Now what happens?? The tenant goes back to court and sues the authority that allowed it to happen aka the local building dept aka your govt. funded by your taxes.

There is probably some statute that governs the payout anyway but I think you get the drift.

regards, MC

BTW an explaination can only be as good as the question that preceeds it.