$100,000/pa Passive Income...
- Thread starter Jake Milne
- Start date
To break the cash flow down more realistically, what other factors should be allowed for?
Management fees - 7% - $10,500
Insurances, council, water , guess $7000
maintenance - guess $1000 average over the years.
Stamp duty and other purchase costs (135k) interest of $7,500
other miscellaneous costs unknown.
I calculate you're left with about 40k cashflow in your hand, before tax.
Of course you should get capital growth, rent growth and depreciation.
Is this right?
It seems right.
I used some conservative figures- 6% yield instead of the 7% used previously, to allow for stamp duty and PM. 7% is achievable, but not normal.
But my point is that $6M of borrowing is not necessary for income- it does come into effect much more though for growth. There's not a big difference in income on these assumptions borrowing $1M or $6M.
The difference is the capital growth, which would be much bigger with the bigger borrowing.
I used some conservative figures- 6% yield instead of the 7% used previously, to allow for stamp duty and PM. 7% is achievable, but not normal.
But my point is that $6M of borrowing is not necessary for income- it does come into effect much more though for growth. There's not a big difference in income on these assumptions borrowing $1M or $6M.
The difference is the capital growth, which would be much bigger with the bigger borrowing.
Buing 25x $300k properties will, as someone mentioned earlier, rack up your expenses pretty quickly.
Or you can just buy a $2.5m commercial property yielding 7.5% net (if you can find one).
No hassles, all expenses paid for by tenant. Of course this comes with the downside of tenancy risk. The more rural/cheap you go, the harder it is these things rent out if your existing tenant blows up or leaves. Only need to look at the inner city suburban strips around Sydney and Melbourne at all the vacant shops. No one wants to rent there because for every kilometre you move away from the centre, the potential areas of operation increase by some new radius squared x pi - original radius squared x pi.
If you bought in a very good location, you'd never worry about vacancy. Because at the right price someone would rent it. If you were in the CBD, you'd also get a fixed 4% increase in rent in retail. Pretty standard for anyting that's not in an unsual location or laneway. So even if you bought for 6% yield, within 4 years you'd hit the 7% mark.
Or you can just buy a $2.5m commercial property yielding 7.5% net (if you can find one).
No hassles, all expenses paid for by tenant. Of course this comes with the downside of tenancy risk. The more rural/cheap you go, the harder it is these things rent out if your existing tenant blows up or leaves. Only need to look at the inner city suburban strips around Sydney and Melbourne at all the vacant shops. No one wants to rent there because for every kilometre you move away from the centre, the potential areas of operation increase by some new radius squared x pi - original radius squared x pi.
If you bought in a very good location, you'd never worry about vacancy. Because at the right price someone would rent it. If you were in the CBD, you'd also get a fixed 4% increase in rent in retail. Pretty standard for anyting that's not in an unsual location or laneway. So even if you bought for 6% yield, within 4 years you'd hit the 7% mark.
So essentially, what you are recommending is that if you are investing with a starting capital of 1.5mil, it is best to buy two or three multi mil properties so that the holding and acquisition costs of the property do not erode the net yield. So again this sounds like purchasing comm IPs if we are interested in creating passive income stream quickly. Multi mil resi IPs tend to have low yields and one has to pray for cap growth.
My understanding is that the long term trend in bricks and mortar retailing is downwards due to the exponential rise in online retailing. So I am not sure that there will always be strong demand for retail tenancies regardless of location.
Hey guys, I still don't feel like I understand this. You guys say that 1,500,000 in equity/cash can produce 100,000 in net cash flow. But if take this big pot of money and buy 35 properties with the numbers shown below in the attachment (decent yield), the net cash inflow is actually negative:
That means the LVR has to higher at some point which costs opportunity right?
That means the LVR has to higher at some point which costs opportunity right?
Attachments
China - people in the CBD always need to eat / shop. Online shopping, while an important consideration for retail, is quite irrelevant to people who operate businesses in prime locations in the CBD where foot traffic is, and always will be, king.
This is where the inclusion of some NRAS properties will assist. They will CF+ immediately, tax free- and that can have a multiplier effect that enables you to create equity and increase your borrowing capacity far sooner.
Otherwise, without massive growth AND massive income with which to utilise that growth, you wont get near 13,14 or 15 properties, and you wont get near 100K passive income. Not even close. Why? Because most investors dont get past 2 or 3 investment properties. I realise everyone has grand delusions about how far a capital growth strategy can carry them, because someone they know says it created magic for them, but the reality is that 26 years after Neg gearing was introduced in 1987, and 26 years after CGT was halved in 1987, and after the greatest capital growth boom and credit boom in history, fewer than 3% of all property investors have purchased more than 2 investment properties. Only a very very very small number have made a capital growth strategy work for them across 12,13,14, 15 properties.
There may well be posters on here who have done it, but they are very much the exception to the rule. If all it takes is growth to build a portfolio and generate a passive income - why have so few people done so in the easiest property era mankind has ever known????
NRAS doesnt need to be all of your portfolio, but the Cash Flow it generates is most definitely going to be the engine that drives the portfolio forward, so it needs to be part of your portfolio....unless, as I said earlier, you are one of the lucky and fortunate few who enjoys massive growth and massive income simultaneously, with which to utlise the growth. Cos without the cash flow, all the equity in the world is useless.
How can it be the engine to take your portfolio forward if
a) majority of nras properties have a premium price (thereby reducing the capital growth achievable in the short / medium term)
b) They screw your serviceability for future properties to the wall due to their yields being extremely low. Sure you can go with lenders who accept the gov payout portion for the nras property, but what about for future normal properties when you declare your pitiful rental income?
With 2.5 Million available, I'd be after 25 x NRAS properties.
Assuming a P/Price of 400K per property - take 100K for deposit and stamp duty, use majors until you run out of borrowing capacity, then use Adelaide Bank and Firstmac @ 80% LVR, where they utilise the rent, your income and the NRAS incentive for servicing, to keep going...
Go and buy 25 x 400K properties. 100K deposit for each one to cover 20% deposit and stamp duty ( there's the 2.5 mil used up)
At 80% LVR, each property should run at about CF neutral. And each one will then produce a $10,350 Refundable tax offset/NANE.
There's @258,750 tax free money in year 1. Or 10.35% tax free yield on 2.5 million. Add @ 5% indexing for Year 2. ( 271,687- or 10.87% tax free yield on 2.5 Mil) add 5% indexing for year 3 ( 285,271 or 11.41% tax free yield on 2.5 Mil ) add 5% indexing for Year 4 ($299535.46 or 11.98% tax free yield on 2.5 Mil) add 5% indexing for Year 5 ($314512.23 or 12.58% tax free yield on 2.5 Mil ) and on it goes..... for 10 years - Year 10 would produce $401,406.26 Tax free- or 16.06% tax free on 2.5 Mil. And this is after after all expenses, interest, rates, p/mgt etc have been accounted for. Where are you going to beat those yields?????
Use the cash flow to start paying off some of the 25x 320K INV mortgages you took out against the NRAS properties ( 320K is 80% of 400K - you funded the 80K deposit and 20K for stamp duty and legals, from the 100k mentioned earlier) , one at a time. With that sort of tax free cash flow flowing in, you should have no trouble paying down at least 7 or 8 of those 320K loans in full by the end of year 10. That would mean only 17 or 18 of the 25 properties would be left carrying any debt.
Then you could sell those 7 or 8 debt free properties at 400K each (even if they have made $0 growth) , take the profits and pay off 8 or 9 of the other 320K debts , reducing the number of properties carrying debt from 16 or 17, down to 8 or 9. You'd be left with about half your 16 or 17 properties carrying debt, and about half carrying no debt, which should result in pretty bloody healthy cash flow. The properties left with debt would be well and truly CF+ by a few K per annum by Year 10 and beyond, even without the NRAS - and the 8 or 9 debt free properties would conservatively be producing $590-600 rent per week each by then ( $31,200) before expenses - based on achieving just 4% compounding rental increases across 10 years. Like I said - pretty impressive cash flow, and that was all done without any capital growth.
Get decent growth as well, ( just 4% per year, compounding ) and you will end up with 200K equity in each property, as they'll be worth 590- 600K by Year 10. That would provide you with enough profit from the sale of the first 7 or 8,( 600K x 8 -= 4.8 Million) to pay out almost all of your remaining portfolio ( 17 x 320K = 5.4Million) leaving you with more than 16 or 17 properties producing over 30K rental income per year.... and debt on just 2 or 3 of them. There's over 500K of cash flow per annum- and little debt. You'd have a decent chunk of tax to pay at this point, but you'd still enjoy over $291,450 of net income
Or you could use the equity from the debt free INV properties to buy another 5,10,15 properties- gear them to 70 or 80% LVR so they ran CF neutral and just keep going and going and going ...
This is the way NRAS creates a Multiplier Effect - and in the first scenario, not a dollar of capital growth was required in order for the strategy to deliver the goods. And just a small amount of growth was required to produce the incredible 16/17 property outcome.
Before you all pile on- Not suggesting there wont be growth - just showing you that it isn't required for the strategy to work. It's recession proof investing.
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Well, Ive answered these questions at length many times- but will do so again
a) stop looking at the wrong sources for the stock. Every piece of stock I work with values on the button, or within 10K. And Im not the only one. Good NRAS deals exist. Work harder to find them - or call me.
b) They do NOT screw your servicing. If you utilise the correct lenders, they enhance your servicing. An NRAS property helps reduce your NON DEDUCTIBLE debt as it goes, which helps improve your borrowing capacity. If you redeploy the surplus cash flow towards paying off your mortgage fast, this more than compensates for the 20% reduction in rental income, used on the banks servicing calculator, especially if you use lenders who take neg gearing into effect, because it effectively reduces the 20% discount by 37 or 45% ( depending on your marginal tax rate)
There seems to be some false belief, inherent in many of the questions people post on here over various topics, that capital growth equates to improved borrowing capacity. The two are completely unrelated. I think the easy credit ride of the 90's has created some false and unrealistic expectations amongst those who enjoyed the easy times of that particular era. But the reality is that if you run out of borrowing capacity, you run out of borrowing capacity. And where banks were able to find new products and create innovations through their servicing calcs and LMI policies in the 90's to get past these boundaries- they cant any more. All those tricks have been exhausted. Not sure the reality of that is quite registering for many of the posters here? lol
So whether you are geared to 5% LVR, 50% LVR or 95%, no amount of equity increase will produce income to increase your borrowing capacity. Only cash flow does that. You need debt reduction/equity creation happening alongside cash flow, in order to grow your borrowing capacity in the next decade and beyond, because the banks aren't going to do it for you with policy changes/tweaks like they were able to in the 90's.
Ive said many times- NRAS neednt be all of a portfolio, but you cant afford to ignore the cash flow it provides to a portfolio. Find a broker who understands servicing calcs beyond the major banks or what their fancy aggregator software calculates for them- and you'll get a real eye opener as to just how clever and effective NRAS can be if you put it in the mix. If your broker doesnt "get it" - have them call Aaron or Rolf or MickC or someone who understands the real mechanics of servicing.
Precisely. Also the trend now is more apartments so more residents, inner city living is the new thing, and populations are booming especially in Sydney and Melbourne.
http://www.theage.com.au/national/city-of-8-million-unliveable-20080904-49xo.html
Haven't really looked at NRAS nor understand them. But others have raised issues already here. In any case I highly doubt anything with 10% yield is "recession proof". At least I'm pretty sure Consumer Affairs and ASIC would agree on that one. But anyway.
For some people including myself capital growth is an important reason I invest and probably the main one. Therefore a strategy that relies on no capital growth is, while sound in some respects, not necesarilly what some people would want.
I just realised you were selling NRAS products. I have no qualms with that - but really dislike it when people diss other investment strategies in order to promote their own. I never tell people my strategy is what people should use, because everyone has different investment styles, horizon, circumstances etc.
No dissing of other strategies deltaberry- just commentary on how NRAS can compliment any strategy by adding cash flow. And the post relates to generating cash flow, so I think it's suitable to talk about cash flow.
Few people would invest in a share portfolio that was all high growth. They'd more than likely diversify their share portfolio and invest in some high yielding stock as well, and perhaps reinvest through a dividend reinvestment plan in order to grow their portfolio that way and grow their yield. I think this can apply to property as well.
I'm also not dismissing the role of capital growth; just highlighting that growth alone without cash flow wont get most people very far, and because I don't believe growth will be as prevalent or happen as quickly as it did during the last compounding growth phase, there's a lot of merit in making sure cash flow plays a role, to offset the slower growth and counter the more constrained credit availability that are the reality of post GFC residential mortgage lending. There are obviously exceptions to the rule; those with very high incomes or very low debt and significant equity can contiinue to invest where others cant, because they have the income to borrow and utilise their equity better than most. They dont necessarily need the investment itself to generate a lot of cash flow - but for most people that's not going to work. The fact that so few investors get beyond 1 or 2 investment properties supports that argument, and that data comes from a period where growth and credit were as good as they get. Im simply saying that with an NRAS or two in the mix, they can get beyond 1 or 2 properties.
In the example I used above, where 2.5 Million was "available" to invest, I think a return like Ive demonstrated is pretty phenomenal- even without growth . But as I said in the post, I am not suggesting there wont be any growth. Im only suggesting that IF there were to be no growth, the strategy still delivers undeniably impressive results.
What Im trying to illustrate is that even without growth - i.e in a worst case scenario where the property market goes into a prolonged period of blah, or worse still, falls dramatically , NRAS would allow investors to hold on through that turmoil where non NRAS wouldnt, unless the investor was geared below 70 or 80% and the property was CF+ anyway.
Stress Test a portfolio geared above 80%, where interest rates reach 9 or 10% and values have fallen 10 or 20%, and you'll see where I'm coming from when I use the phrase "recession proof" NRAS will in most cases allow you to carry rates of 10% or more and stay CF+ or CF Neutral, and ride out any disaster. If "recession proof" isnt the appropriate phrase, perhaps "disaster proof" or "shock proof" might be more appropriate?
Few people would invest in a share portfolio that was all high growth. They'd more than likely diversify their share portfolio and invest in some high yielding stock as well, and perhaps reinvest through a dividend reinvestment plan in order to grow their portfolio that way and grow their yield. I think this can apply to property as well.
I'm also not dismissing the role of capital growth; just highlighting that growth alone without cash flow wont get most people very far, and because I don't believe growth will be as prevalent or happen as quickly as it did during the last compounding growth phase, there's a lot of merit in making sure cash flow plays a role, to offset the slower growth and counter the more constrained credit availability that are the reality of post GFC residential mortgage lending. There are obviously exceptions to the rule; those with very high incomes or very low debt and significant equity can contiinue to invest where others cant, because they have the income to borrow and utilise their equity better than most. They dont necessarily need the investment itself to generate a lot of cash flow - but for most people that's not going to work. The fact that so few investors get beyond 1 or 2 investment properties supports that argument, and that data comes from a period where growth and credit were as good as they get. Im simply saying that with an NRAS or two in the mix, they can get beyond 1 or 2 properties.
In the example I used above, where 2.5 Million was "available" to invest, I think a return like Ive demonstrated is pretty phenomenal- even without growth . But as I said in the post, I am not suggesting there wont be any growth. Im only suggesting that IF there were to be no growth, the strategy still delivers undeniably impressive results.
What Im trying to illustrate is that even without growth - i.e in a worst case scenario where the property market goes into a prolonged period of blah, or worse still, falls dramatically , NRAS would allow investors to hold on through that turmoil where non NRAS wouldnt, unless the investor was geared below 70 or 80% and the property was CF+ anyway.
Stress Test a portfolio geared above 80%, where interest rates reach 9 or 10% and values have fallen 10 or 20%, and you'll see where I'm coming from when I use the phrase "recession proof" NRAS will in most cases allow you to carry rates of 10% or more and stay CF+ or CF Neutral, and ride out any disaster. If "recession proof" isnt the appropriate phrase, perhaps "disaster proof" or "shock proof" might be more appropriate?
That is not what is being recommended. That's just your take on it.
Blocks of units could go well towards the goal. I once had nine under one title. They were excellent for cashflow and growth. We only sold as we needed finance for our business.
Stop self-promoting Euro73
10 in 5 once the developments are finished
But some of them are in the country so in city numbers its more like 7 in 5.
But some of them are in the country so in city numbers its more like 7 in 5.
He is simply selling his product but he has contributed to the forum undoubtedly and professionally. Having said that, I'm still yet to find a NRAS worth buying
He is simply selling his product but he has contributed to the forum undoubtedly and professionally. Having said that, I'm still yet to find a NRAS worth buying
I'm always a bit skeptical, because they're generally only worth it in areas that have low prices and low rental returns.
However as the increase in NRAS payments is only indexed with CPI (I think), this could mean that you're actually losing money by year 10, depending on how much rents increase in that period.
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