Boom, Bust or no Bust

[abcdiamond]

Boom, Bust or no Bust, eventually property prices will double again sometime, so working on this theory, can anyone explain any problems with the plan outlined below ?

If a $300k property gets you a rental income of $300pw, equivalent to say 25% of average income, then 4 properties will provide 100% of an average income at todays prices.

Assuming that rentals keep pace with inflation, then these 4 properties will still provide 100% of an average income at any year in the future.

If you are able to buy 8 of these properties, and sell 4 of them when the property prices have doubled, you will own the other 4 outright.

There are other costs involved like rates etc, so to play safe it would be best to buy 10 properties, sell 5 when they have doubled, and be left with 125% of an average income. The extra 25% should cover those other incedental costs.

I have not checked on what percentage of average income is average for Rental, or even how it has changed over the years. If anyone has this info handy it would be interesting to see the actual figures. I have only worked on what I have been told by specific people that have been renting for some time.

Some people will say, why sell at all? I tend to agree, but for this exercise I am aiming at showing the point of becoming self reliant, without any debt, and that it is possible, with or without booms and/or busts.

All that seems required is the ability to purchase 10 average properties, and rent them out at average rents. And of course for Capital Growth to continue as it has during the past. And that past includes ups and downs.

The potential for "No tenant periods" is obviously a concern, but with the correct property, this should not be a major concern. It is the Landlords duty to themselves to offer a property that is more rentable than the others in the area, therefore keeping vacancy periods to a minimum.

It is also essential to get properties that are as cashflow +ive as possible, (after all deductions and Tax benefits) as you will need to finance them until the values have actually doubled.

 

[D.T.]

Hi abc d.

Nice post. Sounds great in theory, and is quite similar to what Somers' writes in her books. Using the same idea that you wrote about, you wouldn't need to sell the properties at all if you were willing to wait for the rents to exceed the payments - this is along the lines of 10 x 50% = 5 x 100%.

This isn't the strategy that I plan to follow, but it'd probably work over the long term nevertheless. Then again, I think almost anything would, theres a million ways to skin these cats.

Im fairly sure that the no tenant problem you speak of is better prevented than cured, by using a property purchase selection criteria.

It'd be good to hear more experienced investors thoughts on this thread.

-Regards

Dave

 

[Tibor]

Hi there,

Let me mention a couple of points where I see problems with this theory, albeit if all goes well, it works in the long term.

1. You have to be able to contribute 8x$60,000 that is $480,000 as capital for the 8 properties. also closing cost around 5% a piece is 8x$15,000 another $120,000, totalling $600,000. A bit of ask for an average person.

2. You need to be able to service the loan, which even at current interest rates (let's say 6.5% and the 80% of $2.4 million) is $124,800 in interest. You gross rent is exactly this amount ($300x52x8). No allowance for vacancy and fin institution will allow around 80% of it for serviceability.

3. Pay council rates, insurances, repairs, etc. I would allow at least $20,000 for them on the 8 properties.

4. No allowance for land tax, meaning needs to be spread among the states and identities who own them. Again no allowance for maintaining these entities (ie trusts).

5. Depreciation will bring some money in, but at the end will increase the CGT, that is when you sell you'll have to pay more.

Sustain this negative cash flow (do not loose job, have major increase like babies, family crises, sickness, etc) while your properties double in value and also the rent catches up to reduce the burden.

When you sell.

RE agent conservatively 2.5%
Financial institution, solicitors, another 1%
CGT at least 25% on gain, maybe more if depreciation amount is large and hope the government will not change the current arrangement (obviously, not in your favour), then you will start repaying the other loans and will have 4 properties left (debt free)
and now you will pay full tax on the earnings, as eventually you'd like the cash-flow to live on.

Is it really the best strategy?


Tibor

 

[Peter_Tersteeg]

Tibor has given a more realistic rundown of the figures involved in the buy, hold, sell strategy.

Another strategy to consider is to buy, hold and not sell.

If you can buy 8 properties now with the aim to end up with 4 debt free to provide you with an income, what will be your situation if you simply don't sell them?

First of all, you won't have all the costs and taxes associated with selling.

Secondly, your rents will increase, but your debts will have stayed same - assuming that along the way you make up for negative gearing shortfalls and don't reduce the principal.

If your rent from 8 properties doubles with the same amount of debt, you may find yourself with the income you wanted, but with 8 properties instead of 4.

You'll be even better off after the cycle repeats itself and values and rents double again.

I think I saw somewhere recently that even Jan Somers has only ever sold 2 or 3 properties.

You've identified a good strategy of buy and hold, aiming for growth with a decent rental return to help sustain your porfolio. If it suits you to sell in 10 or 20 years, great. That decision will be best made when the time comes.