Explain how one can keep accumulating property

[simonjulie]

You can probably start by contacting a good broker and having a chat. This forum hosts a number of great folk.They can give you an indication as to your serviceability and find the best finance deals.
Just keep asking questions and someone will point you in the right direction.
It seems to me that your imediate challenge is acquiring property, so start practising finding a great deal. It won't cost you anything but your time. Educate yourself as to what is a good property and start finding properties that fit your criteria.
There are countless posts in the forum archives that cover this subject so take advantage of all the free education available right here.
Cheers
Simon

 

[bradje]

Cheapies

So would it be true to say, that overall, it is better to buy in the bottom third of the market so that you can achieve +ve cashflow quicker?
This would then enable refinancing sooner for those people close to 80% LVR.

What's the argument for buying at the higher end, like beachside suburbs?

I'd be interested to know people's thoughts on investing at both ends of the spectrum.

JB

 

[simonjulie]

There is no argument. I buy that type of property because I can.
But I couldn't do that when I first started. I had to buy what I could afford.
Simon

 

[Les]

G'day bradje,

So would it be true to say, that overall, it is better to buy in the bottom third of the market so that you can achieve +ve cashflow quicker?

I think I'd say (when you are starting out) to buy in that lower quadrant because:-
1. The yields are typically higher (better chance of +ve cashflow)
2. 100% of people can afford to rent your IP
3. Most people can afford to buy them (if it came to that)
4. Finance is relatively easy to get, even on a lower wage
5. You can afford 2 or 3 properties quicker/easier, thus lowering your risk (if a tenant leaves, you haven't lost 100% of your rental income if you own 3 IP's)
6. It's not out of most people's reach as "a place to start" - and starting is important if you are going to succeed. (You can't change direction in a parked car )


My only caveat to the above is that "cheapest is not necessarily best" - so buying the very cheapest property you could find may act against you (especially if it is cheap because it has a "bikie's headquarters" right next door - or similar...)

Start small, but start

Regards,
PS Jan says buy at or near the median for a suburb (consider, though that "median" does NOT mean average - so it is common for a median value to be a "number 3" house - with the lowest house being 1 and the most expensive being a 10 in any given suburb)

 

[ArJay]

Great post Les... very insightful.

R

 

[see_change]

So would it be true to say, that overall, it is better to buy in the bottom third of the market so that you can achieve +ve cashflow quicker?
This would then enable refinancing sooner for those people close to 80% LVR.

What's the argument for buying at the higher end, like beachside suburbs?

I'd be interested to know people's thoughts on investing at both ends of the spectrum.

JB

I'll buy where I think I can get the best return in the short to medium term. IMHO you can make good money from all types of property at some stage in the cycle so why limit yourself to one market . One of the best percentage gains I've heard of from rocky came from a bottom end property that I wouldn't personally touch with a ten foot barge pole ( I did inspect - but decided the property and tenant wern't worth the hassel , but someone on the forum did buy it and did well , though had problems with tenant ).

Typically , well placed , central , blue chip properties tend to move early in the cycle , then the "wave " moves out from there. If you are trying to maximise your returns , one way to do it would be buy this sort of property first and then buy other types of property as the cycle progresses.

Where are we in the cycle ?

See Change

 

[Pete]

So would it be true to say, that overall, it is better to buy in the bottom third of the market so that you can achieve +ve cashflow quicker?
This would then enable refinancing sooner for those people close to 80% LVR.

What's the argument for buying at the higher end, like beachside suburbs?

I'd be interested to know people's thoughts on investing at both ends of the spectrum.

JB

I like See Change's comments just now. Where are we in the cycle?

My preference is the beachside strategy. When the market is rising the capital growth allows refinancing sooner than if I'd bought cashflow positive and did not have the capital growth. For example, buy a $1,000,000 beachside house at 80% LVR. Say one year later at 25% growth the value is $1,250,000. Refinance to 80% and you have an extra $200,000 which can be basically a 20% deposit on another place. Continuing such highly leveraged high growth for a couple of years will grow the portfolio (and equity) at a truly astounding rate.

(The last five years some Perth suburbs have had house prices growing at 20% to 25% per annum - refer REIWA website. Beachside houses have done better. It has been an extraordinary growth phase. This approach has been working in Perth the last few years.)

Such an approach looks riskier at this stage of the Perth market.

IMHO it makes the relatively small gains from positive gearing insignificant.

Like See Change wrote, it depends on where you are in the cycle. And a myriad of other factors too.

Jan Somers in her books compares approaches and concludes, as I understand, that it doesn't much matter what approach you take - all approaches diligently applied lead to success.

Jim McKnight's "Ordinary Millionaires" seems to have a similar message.

So, take whatever approach best suits you. Keep going and success should be achieved.

regards,

 

[ArJay]

My preference is the beachside strategy. When the market is rising the capital growth allows refinancing sooner than if I'd bought cashflow positive and did not have the capital growth. For example, buy a $1,000,000 beachside house at 80% LVR. Say one year later at 25% growth the value is $1,250,000. Refinance to 80% and you have an extra $200,000 which can be basically a 20% deposit on another place. Continuing such highly leveraged high growth for a couple of years will grow the portfolio (and equity) at a truly astounding rate.

I can see where you are coming from Pete and having that level of growth is definately what we all aspire to no doubt.

The only unfortunate thing in our case is that at this stage of our investing life buying in a beachside suburb may be just affordable but being neg geared so heavily is not. Would prefer to purchase based on hi CG but for us the amount of time it would take to get the property to anything resembling neutral holding costs is way too long.

5-7 years down the track when the portfolio is up and running it won't be a problem as the LVR and servicability should be at an acceptable level. That's when things could be ramped up CG wise and it become possible to purchase IP's with focus toward higher growth.

Was crunching numbers based on Les's recent post last night and came to the conclusion that it may be the way to go as a fledgling investor. Would give us the ability to work part time and renovate given that the servicability would be relatively low and the LVR kept to a sustainable level.....cheers Les!

Rory

 

[Pete]

... at this stage of our investing life buying in a beachside suburb may be just affordable but being neg geared so heavily is not. Would prefer to purchase based on hi CG but for us the amount of time it would take to get the property to anything resembling neutral holding costs is way too long.

5-7 years down the track when the portfolio is up and running it won't be a problem ...

I suggest funding the negative gearing will be little different in 5-7 years from now. If rents are heavily committed to serviceability they will be no more available than they are now. A different approach/perspective might be in order.

Such as, buy a beachfront place for $1,000,000 in a market likely to grow for the next couple of years. Borrow 80% - $800,000. After capital growth of 25% (which might take one or two good years) or $250,000 then reborrow 80% of this amount: $200,000. These funds can be in a LOC used to help service the negative cashflow for some years. This is offered as an idea not a recommendation.

cheers,

 

[rj]

My strategy is to eliminate the serviceability gap by not having one at all, and purchasing outright. My overall goal? To create passive income through living off rent money and never having to work again.

RJ

 

[Pete]

Eliminate the serviceability gap by not having one at all, and purchasing outright. Its do-able and infact ridiculously easy.

I know because I have a "special" mentor

RJ

RJ,
Care to elaborate?

 

[ArJay]

Mmm....have to explain RJ. Are you suggesting not leverage at all and save for the full sum of the property....confused. That would take me three lifetimes

R

 

[rj]

RJ,
Care to elaborate?

Oops, sorry Pete. I edited that post.

No worries - Ill try to elaborate as best I can given the fact that I havent got a definite plan structured yet - just know which direction I want to head in.

This is something that Ive been thinking about a lot - usually whilst renovating the IP that I have. Its funny how your mind wanders when you spend a whole day painting walls! Whilst renovating is great, Ive learnt heaps already, I dont see it at this point as being a long term strategy. I dont know about you guys, but coming home every night at 11pm covered in plaster dust, paint, dirt dust and grime isnt exactly what I call fun. Some nights Im absolutely buggered, honestly. Its fun but its hard dirty long tiresome work!

This serviceability gap that continues to rear its ugly head on this forum is something that REALLY irritated me a LOT. I used to think all the time HOW, HOW HOW can it be eliminated - and the answer is simple, by not having one at all. This is why I found myself a mentor.

For me its about creating INCOME, money coming in. I dont want a shortfall, and I sure as hell dont want to be sanding walls for days on end, week after week.

So in having said that, I think where I really want to head is into development. I may start a new thread soon and ask additional questions but initially Id like to consider building houses out this way where I live at Springfield Lakes, then moving to perhaps units or townhouses. I say houses initially for affordability reasons, and also to LEARN and get the experience and build confidence from that. After speaking with my mentor I have grown to realise that there are definitely MORE options than I realised. Especially in terms of residential property.

I have no interest in owning 50 residential properties, trying desperately to service loans, with a shortfall, stuck in some crappy job earning $20 an hour, worrying if I can make the rates payment, or how Im going to fix a toilet that wont flush.

But I sure as hell have an interest in wealth creation and passive income.

Like I said, nothing definite yet, but I believe that it can be done and intend on going for it - BIGTIME.

RJ

 

[see_change]

RJ , are talking about doing developments with borrowed money and keeping some on the properties , fully paid off as your profit ?


See Change

 

[Pete]

Thanks for the explanation, RJ.

Yes, developing sounds good. Borrow the full cost of the project (against its finished value), AFAIK. I'm slowly learning about it and inclined to not rush into it. Need to change MY perspective.

regards,

 

[rj]

RJ , are talking about doing developments with borrowed money and keeping some on the properties , fully paid off as your profit ?


See Change

 

[MichaelW]

Nice one,

You can either adopt a passive approach and hope that the market creates the equity for you over time, or you can actively "build" the equity into your portfolio yourself. Reno-ing is one method, but developing has a lot more potential upside. How much equity, or what LVR you're comfortable with, is a question of personal preference and SANF. Some prefer a lot more equity in their debt mix so would like to do as described above and keep a minimal portion of the development but be debt free.

If my development plays out as planned then I have the option of selling two, keeping one, and being left virtually debt free on that remaining property. Wouldn't be a bad state of affairs if it values at around $650K as hoped and returns $550pw in rent.

I'm a tad more aggressive than that so might sell one and hold two and be happy with the portfolio being pretty much neutral on cash flow. But time will tell...

Cheers,
Michael.

 

[rj]

Nice one,

You can either adopt a passive approach and hope that the market creates the equity for you over time, or you can actively "build" the equity into your portfolio yourself. Reno-ing is one method, but developing has a lot more potential upside. How much equity, or what LVR you're comfortable with, is a question of personal preference and SANF. Some prefer a lot more equity in their debt mix so would like to do as described above and keep a minimal portion of the development but be debt free.

If my development plays out as planned then I have the option of selling two, keeping one, and being left virtually debt free on that remaining property. Wouldn't be a bad state of affairs if it values at around $650K as hoped and returns $550pw in rent.

I'm a tad more aggressive than that so might sell one and hold two and be happy with the portfolio being pretty much neutral on cash flow. But time will tell...

Cheers,
Michael.

My strategy and aggresive approach is very similiar to yours Mike. I like your style - best of luck man.

RJ

 

[see_change]

I think it's easier said than done.

People go bust if they don't get it correct . I have met people who went bust at the end of the last cycle by not getting things correct.

Helps if you have equity . We own our site outright ( we live on it ) which means we don't have holding costs ( and it's only a small one ) . MW has a fair amount of equity behind him.

Someone like JK has worked in the industry for years and is married to a builder and has done several developments leading up to Platinum.

Someone on the forum tried to do a large scale development from scratch with no money in several years ago and up with a very interesting learning experience .

It can be done , but it's the exception not the rule .

See Change

 

[rj]

Someone on the forum tried to do a large scale development from scratch with no money in several years ago and up with a very interesting learning experience

I wouldnt be borrowing the entire amount.

See Change - would you have a link to this thread?

RJ