Explain how one can keep accumulating property
- Thread starter Mustang
- Start date
leapyeah said:- something where a whole new array of financing options may open up or you have "made it to the next level" somehow.
Don't know about a whole new array of financing opening up when we hit and got over the serviceability limit..... it was more like "forced to find other forms of finance"
Cheers,
The Y-man
I don't think there's a single point- there are various critical masses along the way. My first was when my bank refused to lend me more- I got over that one by taking some loans away from them. For me then, they were pusing the friendship by lending me $1.1M- anything over $1M probably made them uncomfortable.
Even those critical masses along the way will vary from person to person.
Even those critical masses along the way will vary from person to person.
Something no one else seems to have mentioned is one of the most important - TIME!
Over time your property for example will become neutral, and eventually positive, giving you additional cashflow. Once you start (the hardest part) this process will compound over time and allow you to accumulate property steadily until retirement.
To be honest, there isn't really any quick fixes. There are ways to speed up the process as others have mentioned (Cashbonds, Shares and whatever else) but time is still one of the most important and there is no substitute for time.
I will give my own situation as an example. I currently own two properties.
1. Purchased in 2001, it was negative in 2001. Now it's almost neutral.
2. Purchased in 2003, still negative but getting good rent increases, probably be positive by 2008-2009.
So that means in 2009 I could purchase more property, and so on.
Over time your property for example will become neutral, and eventually positive, giving you additional cashflow. Once you start (the hardest part) this process will compound over time and allow you to accumulate property steadily until retirement.
To be honest, there isn't really any quick fixes. There are ways to speed up the process as others have mentioned (Cashbonds, Shares and whatever else) but time is still one of the most important and there is no substitute for time.
I will give my own situation as an example. I currently own two properties.
1. Purchased in 2001, it was negative in 2001. Now it's almost neutral.
2. Purchased in 2003, still negative but getting good rent increases, probably be positive by 2008-2009.
So that means in 2009 I could purchase more property, and so on.
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geoffw said:
Geoff,
Do you mean $1m at a time or $1m in total ?
In total.(Ata time when the average house where I was buying was $250K)saucy gibbon said:
Frank's point is good. I'm in the middle of renegotiating a loan. My business income doesn't go back long enough for the bank- but all of my properties have had rent rises over the years, to the point that theyare looking purely atrents to satisfy servicibility.
Bummer, I think I'm about to cook that by about $400k.
Mustang said:
Mustang,
This is how I have used a Cashbond/Annuity to keep purchasing IPs. I use it in conjuction with my CGA Strategy -
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.
Mustang, as you can see there are lots of ways to get past the servicing hurdle if you hit it. However, this is not something you need to worry about just now. You haven’t hit the hurdle yet, so you just need to make sure you can afford the next property. Are you sure your wife isn’t asking how to accumulate multiple properties because she’s worried about the whole concept of investing? I’ve noticed people who are worried tend to ask irrelevant what-if questions.
In your case, since you haven’t hit the servicing hurdle, it’s an irrelevant ‘what-if’ question.
Alex
In your case, since you haven’t hit the servicing hurdle, it’s an irrelevant ‘what-if’ question.
Alex
Frank has hit the nail on the head.FrankGrimes said:
It takes time. Sometimes more so than others, depending on how the market is moving at the time of purchase. Don't be in a hurry to grow a large portfolio if you are new to the game (especially in a flat market).
Get your first under your belt, improve it if needs be, maybe even look for something that has a higher use, increase your rents when you can & in a few years you will be ready for your next. It's that easy! Don't over analyse it, just do it.
I think sometimes new investors feel a little intimidated by the fact that there are a lot of experienced investors here & expect to have a large portfolio almost overnight. Everyone has to start at their first. The majority of investors that have large portfolios have been around for a while now. If you stick with it, in a few years you will be one of the experienced advising the newbies.
Think outside the sqaure
Agree with what others have said.
There are many ways around the serviceability hurdle, Cashbonds work, shares work, managed business's work. You need to find a method that works for you.
It seems like people are still find +cf properties in rural areas which is another way to overcome serviceability.
Developing is an option. Just depends on what will work for you. The sleep at night factor is a major concern.
Cheers
quoll
Agree with what others have said.
There are many ways around the serviceability hurdle, Cashbonds work, shares work, managed business's work. You need to find a method that works for you.
It seems like people are still find +cf properties in rural areas which is another way to overcome serviceability.
Developing is an option. Just depends on what will work for you. The sleep at night factor is a major concern.
Cheers
quoll
just to give another example, this may be a little outside the scope of the forum but its relevant to the topic. i write covered call options over my shares to provide an extra income. it hasnt been working totally how it should over the past 9 months but it certainly hasnt given a negative return.
i very much doubt whether a property lender assessing my income will give this income too much weight in their calculations, but it sure helps me with the margin loan interest.
what im trying to show though is that theres lots of ways to increase cashflow.
if only there was a way to renovate shares to produce equity!
i very much doubt whether a property lender assessing my income will give this income too much weight in their calculations, but it sure helps me with the margin loan interest.
what im trying to show though is that theres lots of ways to increase cashflow.
if only there was a way to renovate shares to produce equity!
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