$100,000/pa Passive Income...

[MTR]

For about 10 years I have been investing in Perth property, predominanatly in the South, South-Eastern suburbs (all free-standing and a recent development of 2 strata).
Here is an overview:
6 investment properties at a value of $3,125,000 and a debt of $2,172,500. They generate an annual income of $154,000 pa
We are 40 and 39 (with no dependants) and are hoping to leave full-time employment within the next 5 years with the aim of retiring fully by 48.
Our PPOR is worth $1,100,000 and we owe $360,000 on this. I've never had trouble getting into the market - I'm just having trouble getting my head around the exit strategy.
Suggestions, recommendations, thoughts, comments ... interested to hear how other people have done it and if what we've done is enough for an early and comfortable retirement.

I assume you are a buy and hold property investor, this will be slow and steady unless you manage to jump into a couple of boom cycles and then strategise/tweak your plan. Looks like you got one boom cycle.

I started this way, however I changed my strategy some time ago now to improve cash flow and am still tweaking it. I currently develop property in Perth and putting together plans and permits for 4 unit site in Melbourne, this will generate income streams.

Develop new skills and this is a big one.

Here are some strategies I use that may want to consider moving forward


Purchase higher yield/cash flow properties

Sell property to reduce debt.

Buy property with granny flat (dual income). Harder to find now as too many investors jumping in and price already built in.

Invest in different markets in Australia, watching the cycles closely to capture growth. In a rising market buy multiple properties, sell 2 keep 2, or whatever you can afford to buy, reduce debt, increase cashflow.

Review your property portfolio, ditch the properties that are bleeding, ie older properties that require too much maintenance, highly negatively geared properties where expected growth will be zip for years to come.

Buy development site and build 2/3 units or find suitable property where you can build at rear, sell 1, keep 1. Start with smaller developments.

Put plans and permits together on sell to builder. This requires lots of research, can not always add value, depending on location/State. I have not been able to do this in Perth market. However, in certain pockets in Melb builders will pay a premium for this, because it takes so long to go through council for approval etc.

Buy below market value, renovate and sell for profit.

In a rising market land and house packages can work very well, however your money is tied up, so its a matter of weighing up whether its worth while depending on the expected profit.



I am sure there are many on this site that can add to this as I don't invest in shares or CIP yet, there are some formites generating good cash flow using this strategy .

Cheers
MTR

 

[HiEquity]

Woodley is doing well and would be well advised IMO to generally maintain the course, perhaps with a few tweaks. With no dependents it would only take one property boom to get to a pretty safe place for retirement. MTR has given some good ideas but my ramblings would include:

- Stop buying properties that don't provide net positive cash flow / gearing (even better).
- In other words, buy higher yielding properties. I find CIPs to be a happier hunting ground in this regard but there are other alternatives.
- Use this extra income (on top of your existing income) to pay down debt, thereby increasing cashflow even more, thereby paying down even more debt...
- I assume you can see a virtuous circle developing with that strategy.
- Get far enough along that circle and you can retire with certainty and a reasonable level of comfort. But if you keep buying -ve stuff then your retirement will always be hostage to CGs in the market and / or bankers.
- I believe development needs to be considered like any other career choice ie will you enjoy that as your job and / or get paid better for it than the other ways you could spend your time that provide (potentially more certain?) income. If you are currently on a salary that may provide some advantages in a bank's servicing calculator when it comes time for more finance...
- Selling comes with a lot of costs - CGT, agents fees and time / stamp duty to get the same level of exposure back again. I generally prefer to refinance if I have equity I can access although there have been times that we have sold and haven't regretted it - just be fully mindful of the transaction costs in flipping properties - they are a silent killer. It may be better to hang on and just constantly remind yourself to never make such an investment again!
- As for the idea that properties with high cash flow don't grow, let me just say that I've seen a lot of evidence now that this isn't necessarily the case... to put it mildly.
- Always consider other investments that might do better. For example, banking shares were a screaming bargain during the GFC... not without risk at the time of course but that goes without saying for every worthwhile investment!

 

[Deltaberry]

Some alternative thoughts to the above:

- Find an expensive but severely undervalued property (I saw three and bought two last 12 months, the other one was bought by a colleague of mine) that may or may not have positive cashflow post conventional gearing package
- Acquire it, after maybe 6 months it'll be up by some figure in the 7 digits (maybe $1m, maybe $3m, maybe more)
- At that point, either re-finance or consider selling (after 12 months) so you have more playing cash (which you can use to create income if you like or punt again)
- In my case, the circumstaces were such that these things were so undervalued I'm even significantly net positive cashflow on them on conventional gearing terms (and even if I re-finance them at the increased values)
- As mentioned in previous two bullet points, you can either get the cash out, and chase high-yielding assets (eg 10%+ which some people here fancy and are suggesting) or look for other similar opportunities (albeit they are disappearing quicker than I imagine in markets I like, ie central Sydney and Melbourne, which means if you take this approach you may have to start looking at overseas markets such as the declining western European or declining Hong Kong markets, or the rising USA or UK markets)

 

[Woodley]

With a gross income of $154k and a debt of $2.1M, there isn't going to be a lot of cashflow.

You are correct. We would be in front (a little), except there's always something that comes up or we make some improvement to the properties. Its very rare for us to be out of pocket at the end of each month and the $30K we receive back in tax each year covers water rates and council rates on all properties.

 

[thatbum]

Its very rare for us to be out of pocket at the end of each month and the $30K we receive back in tax each year covers water rates and council rates on all properties.

How are you getting $30k back in tax each year if you are cashflow positive? (before spend on improvements)

 

[HiEquity]

How are you getting $30k back in tax each year if you are cashflow positive? (before spend on improvements)

Sounds like depreciation...

 

[Rixter]

Sounds like depreciation...

I agree... its one of the reasons behind purchasing near new for me...increases & maximises cash flow. A tax deduction for no cash expense outlay.

 

[see_change]

For about 10 years I have been investing in Perth property, predominanatly in the South, South-Eastern suburbs (all free-standing and a recent development of 2 strata).
Here is an overview:
6 investment properties at a value of $3,125,000 and a debt of $2,172,500. They generate an annual income of $154,000 pa
We are 40 and 39 (with no dependants) and are hoping to leave full-time employment within the next 5 years with the aim of retiring fully by 48.
Our PPOR is worth $1,100,000 and we owe $360,000 on this. I've never had trouble getting into the market - I'm just having trouble getting my head around the exit strategy.
Suggestions, recommendations, thoughts, comments ... interested to hear how other people have done it and if what we've done is enough for an early and comfortable retirement.

At the end of the last cycle we sold down some of our properties and paid down debt on the one's we kept .

Bought some good properties during the last four years in Sydney . Currently aiming to buy more properties with the specific aim of selling them once they have gone up in price to pay down our remaining properties . hoping to keep on buying during the current cycle as long as we see areas of potential capital growth,

Cliff

 

[investor2009]

Im of the same camp sea and Rix, aim to sell down to pay other debt thus freeing us from the chains of compulsory work that is our current reality.

My Wife and I earn modest wages of around 60k each and have a total of 4 properties. We wish to sell one or two in 2 to 3 years time and get rid of that nasty mortgage. Its tough enough for us right now and if we bough more props using existing equity then I don't think we would be able to execute this in time so we're sitting for now. After that we plan on buying again but our main priority is being free without a mortgage. If anyone else has a better idea for our plan that involves execution in time AND further profits then we'd love to hear it(?) Seriously.

Our calculations tell us that doing things this way will save us around 950k in traditional mortgage repayments and we would have only paid half of what we originally paid at contract price. Not too mant people get to sat tgat without some sort of inherent monies

 

[poordeveloper]

- As mentioned in previous two bullet points, you can either get the cash out, and chase high-yielding assets (eg 10%+ which some people here fancy and are suggesting) or look for other similar opportunities (albeit they are disappearing quicker than I imagine in markets I like, ie central Sydney and Melbourne, which means if you take this approach you may have to start looking at overseas markets such as the declining western European or declining Hong Kong markets, or the rising USA or UK markets)

Hi Deltaberry, can you expand on what types of opportunity you look at - particularly in central Melbourne and Sydney? Are you into primarily retail, freestanding buildings with development potential, or something else?

Cheers,
PD

 

[Woodley]

How are you getting $30k back in tax each year if you are cashflow positive? (before spend on improvements)

A good accountant, depreciation and those little extras mentioned - mainly maintenance

 

[Deltaberry]

Hi Deltaberry, can you expand on what types of opportunity you look at - particularly in central Melbourne and Sydney? Are you into primarily retail, freestanding buildings with development potential, or something else?

Cheers,
PD

I look at a very small circle - but that's just because of my risk profile, my personal investment ethos and what my finances allow me.

I typically look at CBD commercial and/or inner city mixed use and/or residential. I always only buy freestanding (ie I never buy office floors, apartments or things without a land component). Typically I'm a strong believer of staying within 2km within the centre of the CBD.

Everything I buy has instant cash generation abilities but also development potential (ie I never buy a vacant block of land in the CBD). Don't forget, in the CBD, a free standing 200sqm block is very big and could probably be developed in to a 8-9 stories if it has the right permits, timing, circumstances, financing etc. Even when I look at UK/HK I look for similar charateristics.

That said, there's no reason why you shouldn't look out further, look for things without instant cash generation abilities, or look for offices or apartments. They just don't excite me and they're not a market I'm comfortable with, but plenty of people have made money looking at things like that. Put it this way, if I had unlimited money, I'd buy everything. But because I only have so much money, I can only choose what I'm comfortable after balancing all the risks, my investment strategy etc.

 

[wilkie0611]

100k pa this will eventually be my goal but why stop there right im just waiting for ip one to finish construction (learnt my lesson there) and am getting ready to move on number 2... what do you experience investors beleive made your investing careers easier? a good team helps (accountant, broker and solicitor) i beleive im starting to put a good group together and ive found their knowledge so far invaluable i also believe a mentor could be helpful ? have many people on this forum had the help of a mentor or made it yourself ?

 

[monalisa]

what do you experience investors beleive made your investing careers easier?

- Building a network of like minded investor friends;
- time invested / commitment - MsAli and I spend A LOT of time looking at property numbers and believe the more we do it, the better we get at it;
- following our gut / intuition with all deals that we have done so far;

 

[see_change]

i also believe a mentor could be helpful ? have many people on this forum had the help of a mentor or made it yourself ?

You'll see it said on a regular basis when this question is asked . The best mentor is this forum .

The more you contribute , the more you get backand the more other people are willing to help you.

Cliff

 

[Xjas]

Great thread.

For those that have managed the 10 in 10 or similar, did you start out with that goal in mind or did it grow from smaller plans?

 

[Rixter]

Great thread.

For those that have managed the 10 in 10 or similar, did you start out with that goal in mind or did it grow from smaller plans?

Yes I started out with the goal.

 

[skater]

Great thread.

For those that have managed the 10 in 10 or similar, did you start out with that goal in mind or did it grow from smaller plans?

No, we started with no particular goal in mind. Had one IP that was doing well, so after several years got fired up & went on a spending spree. We tend to buy in bursts. Two, three, maybe four all around the same time. Then nothing, then another burst.

 

[see_change]

We didn't start with that goal in mind .

I look at it as a Journey . When you set out you have general expectations on where you are going , eg Rome in Italy , but while you're going there you might chat to some one who says , you have to go to XY for a day trip , the view is fantastic , there's a great local market and there's this fantastic little restaurant which has the best Ice cream I've ever tasted ....

While I have expectations on what will happen in terms of market performance . Our decision on what to invest in will depend on what we see is happening in the market in terms of opportunities available.

A year ago I was thinking we were finally going to get around to spending some time trying how to work out how to share trade ... In reality we've bought two houses in NSW ( weekender and future PPOR ) and at the moment we're in the process of buying several properties outside NSW as I noticed the market was coming to life.

When we buy we tend to buy several in one area , simply so we don't have to repeat the basic research of getting to know an area. Also, what we buy will depend on what we think offers best value when we start looking in an area. I often find when we start looking at an area there might be properties that have been overlooked by the market for various reasons , usually because they were initially over priced , out of area agent , or a difficult tenant or vendor so sometime we end up buying these types of property. Some times if the market if dead we take our time going around and making low ball offers but if the market is hotter we'll move quicker and offer closer to asking price.

So I consider myself an opportunistic investor.

BTW , Rix is about the only person I seen on this forum who's stated their plan up front and then gone along and actually achieved it so Kudos to him

Cliff

 

[DennisLeung]

Probably sounds like a stupid question but how do you guys measure a $100,000/pa income?

For example if you buy a property for $500,000 and rent it for $600/week, then it will only be at break even point (after borrowing and maintanence costs) which means 0 cash flow. Not accounting for manufactured yield and capital gain, does that mean you guys are counting the future potential increase in rent and capital growth over the 10 years as part of your passive income for properties which are deemed 'buy and hold'?. Or are you measuring $100,000 at the end of 10 years, which will be more like $150,000/pa in today's money?

Otherwise it seems like for $100,000/pa you need $2000 per week which is each of your 10 properties positively geared for $200 per week and that means you need to add value to each property you buy for this plan to work.