Another Method Toward The Road To Wealth

[Michael.Knight]

Ok guys Ive been doing my research, reading books etc and been doing some thinking... Bear with me here...

Jan Somers and many other authors advocate purchasing a property just below the median price range, renting that property out, building equity and using leverage to purchase another property, rent, etc... Repeating the cycle and establishing wealth, buying and holding.

Instead of that method, would this alternative plan work? Start off with buying the most expensive house you can hold in a prime location (eg beachfront), living in it and building up equity through time + capital growth, then selling and upgrading to a more expensive home to live in, build equity... and again repeating the cycle. The advantages of this method are that there are:

- no bad tenants to deal with
- no property management fees
- capital growth would be much greater
- no capital gains tax
- first home owners grant
- tax deductible
- the one super expensive home vs many cheaper homes would also mean less maintenance costs and also less stamp duty / taxes etc over the long run


The bottom line is when building wealth, would the "one capital growth home" method be just as efficient or even more so than the "many less expensive rental homes" method? And if not, why?

 

[jingo]

Hi,

I have heard of people doing this. The person in mind used to build brand new properties in new estates. Settle in, and then resell in a year or so and move into the new one. Mind you it was very disruptive for his family, and they used to get very annoyed!

Not to mention that you wouldn't really benefit from tax deductions and rental income.

But I guess it could work???

 

[WillG]

Sounds like having your cake and eating it !

This approach is keeping all your eggs in the one basket. You will be at the mercy of interest rates and won't have increasing investment income to help service the debt.

This approach can work but is probably not as efficient as buy & hold many IP's . I can probably quantify this with an example.

 

[John Hosie]

G'day,

Does holding 1 prime property really appreciate as much, or more, than holding 4 less optimum properties?

It depends on salary, tax etc. Pouring everything into my own home was a mistake I made early on in my investing career. Though my home grew in equity, I could have been watching an additional 3 properties soar in value and utilise the equity from all properties to go further with investing.

Though loan amounts seem prohibitive at the time of aquisition, a few years down the line, and that sum is negligible in comparison to real estate prices at that time.

The basic formula - buy, hold, build equity and utilize that equity for further investment - is undeniable. There are too many of us that have succeeded with this formula to refute it.

 

[Scott Graham]

G'day Michael,

Have considered this also.

You will find this method mentioned in William Nickersons book on real estate.
He used the capital gain to purchase bigger properties and eventually unit blocks.

No doubt the methods works, but, in the climate where tax laws are different to what they are now.

I don't think it would take long for the ATO to determine that you are carrying out the selling and purchasing of properties to make a profit and therefore you would be liable for CGT.

Or maybe you could speak to an accountant and find out if there is a way around this? If so please let us know

I would think that if you could avoid CGT indefinitely then what you have outlined could work.

Remembering of course the other costs as well involved with buying and selling.

Do the numbers and consider the tax consequences..?

Kind Regards,

Scott.

 

[twobobsworth]

Yep I know someone who did this too. Bought a few years ago for 1.8m. Sold last week for 1.4m.

 

[kingchevy]

all you're eggs in one basket it sound like to me to much risk

 

[Jase H]

You would certainly be taking a big risk considering you are forgoing all rental income, tax savings etc in the search for CG. You would need to outperform in CG terms significantly to even consider. not to mention hitting the serviceability wall so quick with no rental income.

Irronically, this type of strategy may suit someone with a really high income to who serviceability would not be such as issue, but to an average investor on average income I doubt its overall merit.


Jase

 

[wylie]

Don't forget the costs involved in buying and selling each time would eat into the gain.

If I didn't have children, I would love to do this, but the disruption and constant moving rules it out for me. You would never get to know your neighbours if you keep moving. To some people that doesn't matter, but I like to feel a sense of community.

Wylie

 

[kingchevy]

I've been thinking about this method how is that going to help having only one to reap cg of wouldn't it be better with more? I think you're restricting you're growth.

 

[alexlee]

Instead of that method, would this alternative plan work? Start off with buying the most expensive house you can hold in a prime location (eg beachfront), living in it and building up equity through time + capital growth, then selling and upgrading to a more expensive home to live in, build equity... and again repeating the cycle. The advantages of this method are that there are:

- no bad tenants to deal with
- no property management fees
- capital growth would be much greater
- no capital gains tax
- first home owners grant
- tax deductible
- the one super expensive home vs many cheaper homes would also mean less maintenance costs and also less stamp duty / taxes etc over the long run

No property mgt fees, but no rent, either. Capital growth would be greater.... maybe. No CGT, yes, but no deductions especially depreciation (which is a genuine benefit since you can deduct it at your marginal rate now, and only pay it back at half your marginal rate way into the future). Holding costs become much greater. The biggest issue I see with it is that most of us do NOT start with the ability to buy a beachfront house. We start small, then build up.

My own method is to buy below median prices. What I have found is that I am able to borrow and therefore buy more in $ terms by doing this compared to maxing out on my PPOR. Even assuming the capital growth on a more expensive property is higher than on a cheaper one (and I don't necessarily agree with this), would you be better off having a $1m PPOR that goes up at 10% vs having $1.5m in IPs that go up by 7%? Given that you would get rent as well as get all the depreciation and other deductions?

Also what you're not factoring into is the refinancing and buying more property. If you stick solely to your PPOR, are you realistically going to sell every 2 years and buy another PPOR? Expensive from a selling fees and stamp duty point of view. However, with IPs you can realistically refinance and buy more every year or two. While you still have to pay stamp, you won't have to pay selling agent fees. CGT becomes a moot point if you don't sell your IP until a time when your salary is nil and in any case you can use trusts.

Also, as someone else mentioned, does it make sense to concentrate all your net worth on one asset? Would you only buy one share with your entire net worth?

Will your alternative plan work? Yes, given enough time. Is it better than buying IPs, refinancing and buying more, holding for as long as possible? I have my doubts.
Alex

 

[Mofra]

- tax deductible

When you are living in it, not receiving an income?

I'd be very careful with this assumption.

 

[Peter Parker]

Instead of that method, would this alternative plan work? Start off with buying the most expensive house you can hold in a prime location (eg beachfront), living in it and building up equity through time + capital growth, then selling and upgrading to a more expensive home to live in, build equity... and again repeating the cycle. The advantages of this method are that there are:

- no bad tenants to deal with
- no property management fees
- capital growth would be much greater
- no capital gains tax
- first home owners grant
- tax deductible
- the one super expensive home vs many cheaper homes would also mean less maintenance costs and also less stamp duty / taxes etc over the long run

One case where the above could work is at the very bottom end (both your income and the house price) and you were handy (or had friends who were).

Buy the worst hovel cheaply, do it up yourself (sweat equity), sell (or rent out) and buy another (or two). This would have been great in country areas several years back when buying was the same cost (or cheaper) than renting.

It would have been a great way of getting a good PPOR. The main lifestyle sacrifice would have been living in a perpetual building site. Apart from that it could work.

But beyond that, it's slower compared to getting multiple IPs for financial independence purposes. If the IPs are small enough (eg $200k) it's no big deal to add one more to the portfolio and you keep your momentum going as an investor (whereas an $800k PPOR would be a rare purchase). And even if the IPs weren't small, there'd at least be some rental income.

When you want to retire, you'd have to either sell your one property and move out or get a reverse mortgage (as opposed to selling a few IPs to reduce debt and keeping the rest).

The 'accumulating IPs' model also does not preclude you from 1. renting a PPOR better than you an afford to buy and then 2. selling a few IPs to fund a really good PPOR, so is more flexible.

Peter

 

[handyandy]

As I recall the book Ordinary Millionaires by Jim McKnight had a story in it about a couple who traded up houses until they ended up in a water front on Sydney Harbour. As I recall there wasn't high earning cash flows involved, they simply worked hard at finding the right property at the right price.

So it is a doable but certainly would not be a strategy that I would follow for all the reasons already summed up by Alex.

Cheers

 

[myla]

hello,

I believe this technique would be good as a very passive form of increasing your wealth over many years

and I think adding value through renovation would most likely be critical to the scenario

thankyou

myla

 

[stargazer]

Hi all

I have seen this done first hand by some friends. Adelaide

1986...bought prop St peters $25000 renovated lived and sold $75000
1987...bought prop Kensington Gardens $29000 renovated lived and sold$85000
1988..bought prop Rosslyn Park $100,000 renovated and lived in
1991..Sold for $350,000
1991 bought prop Handorf $95,000 renovated and lived in
1994 sold for $450000
1995 Bought Business building ( Restaurant) $150,000 main trendy street
Still hold this one and been offered $1.5m and bought in North Adelaide $300,000 and bought another $400,000
1997 Sold the $400,000 for $520,000
1998 Sold the other one for $695,000
Decided to get in Grapes bought land and other properties currently have 95 acres in clare. etc

This journey has had its concerns and stress via different issues however now they are worth well over $10m with very little debt.
They now hold 4 properties
The Clare vineyard 95 acres
Restaurant in Hutt street
2 Properties in North Adelaide
Now have bought also in Port Douglas i believe

Bought and sold a number of properties in the last few years between Adelaide and Clare

Income is derived via the Vineyard/ Rent etc

The two are a couple and have lived as has been said in appalling conditions when renovating etc. sometimes had no shower or water etc and used our place.

BUT if you got the determination its there.

The formula was simple
Worst house in the best street
see whats happening (Where people are buying or going to buy)
What do people want in terms of interal design and colours etc

Cheers
BC

 

[SeanyB]

Freinds of mine do this as their wealth strategy. Buy a run down place on a sub-dividable block in a blue chip suburb. Tear it down and put two townhouses on it, sell one and live in the other for 12 months.

They are now onto their 4th development and estimate another 3 more will enable them to retire.

I think its a decent strategy if you can cope with the constant moving. Maybe for people without kids or for people with kids who have grown up it might be worthwhile.

 

[stargazer]

Yes correct there is alot of turmoil but thats the price to pay i guess. The reward is it gives you a great leg up in that you don't pay the CGT while building up.

Seanyb
Land in Blue chip is pretty pricey so the numbers would have to look good. What size land?.

Even a small block now say 6k from CBD is around $300k

Cheers
BC

 

[SeanyB]

Well the one they are doing at the moment is 10ks from the cbd, I would assume it cost them 700-800k. Possibly less.

So looking at the figures. It would be something like this:

Initial Property cost : 750k

Demolition and construction of 2 townhouses (2 x 200k) 400k

Total Cost: 1.15m

So each townhouse would want to be worth 700k for it to be worth its while. Its possible to do, but its hard work and to build them yourself you need a group of reliable and competent tradespeople. Also someone who wants to buy it at the end too might help

 

[pieman]

I'm doing something similar, I sold (probably shouldnt have) 3 props. to buy my dream PPOR. Paid 1m cash 18 months ago and as i keep a keen eye on the local market, you would need 1.4+ to buy the same property so 400k less fees etc in 18 months is not bad. Remembering i fully own that prop. and it will allow me to borrow even more!
I only have 1 ip but as the market in melb. in my target group has moved a conserative 20% in the last 6 months i find im getting priced out. Really things have been going up weekly in bayside
cheers
pieman