Buy and hold strategy break down

Hi guys

I am needing some help to set up my investing strategy.

I have explained our situation in a previous thread, http://somersoft.com/forums/showthread.php?t=108502.
We have approximately $350k in equity to get started with but would like to leave the current investment properties at an 80% LVR leaving us with $150 to spend on deposits.

We are still living in remote FNQ so it may be difficult but my plan is to start out purchasing properties in reasonable areas with reasonable growth and yield such as Logan, Slacks Creek, Woodridge in QLD, Elizabeth south or Salisbury North in SA, Moree & Albury in NSW etc etc. I want to target homes that need work as I am a builder and then renovate, hopefully buying below median house prices and then gaining equity and higher yield. Eventually doing more developments.

So I have a plan in place but everyone always says to start out you need to know where you want to be in 5-10 years time and then work out exactly what properties you need to acquire to get there (how much growth and rental income needed from each property). I think if I follow my plan above I will reach my goals but working out the numbers to get there is difficult as I cant plan how much a knocked around old home in Logan is going to sell for and then how much I need to spend on a reno without seeing the condition.

Iv done some BASIC figures below of an example without doing any renovation work or being active at all, but it looks like a very slow growth to get to where I want to be in 5 years time! Can any experienced investors have a look and tell me their thoughts and tricks:

$160k for deposits

Purchase four homes for $250k each and valued at that price.
Each home rents for $260p/w (lousy yield but worst case scenario)

Use LMI to borrow 88% (unsure of LMI cost so leaving it out)

Loan = $880k interest only, Deposits = 120k + costs = $160k

Rental income o/a = $54080 p/a
Interest o/a @ 4.7% = $41360 p/a
Insurance, managing fees, upkeep allowance o/a = $6326.4 p/a

Net Income from rent = $6393.6 p/a
5% (just an average growth) growth on portfolio = $50k

Now I have outlaid approx $40k in costs purchasing these properties (exc LMI) and I have gained $56393.6 before tax. I understand the following years profits will be excluding the purchase costs which is a bit better and the 5% growth in the following year will be calculated on $1050000.
So the following year I use the $50000 in equity I have gained to buy One more property. This year then looks like this:

Purchase 5th property for $250k at valued price.

Loan 88% interest only = $1100000
Deposit = $30k + costs = $40

Rental income o/a = $67600 p/a
Interest o/a @ 4.7% = $51700 p/a
Insurance, managing fees, upkeep allowance o/a = $7908 p/a

Net Income from rent = $7992 p/a
5% growth on portfolio = $65k

Second year o/a profit before tax = $72992. minus the purchase costs of Prop5.

If I then take the equity and keep purchasing by the 4th year I should be able to purchase two properties.

I understand this is a low Yield and 5% growth isnt amazing but I am no accountant so could someone please jump in and let me know where I am missing things? I want to be able to work out how much I need to be bringing in each year to get to my goals.
I understand newer homes have depreciation on the building and the furnishings which has been great for our first two investments but when spending $200 - $250k on homes they probably wont be new enough.

We want to be aggressive with our investing.

Thanks in advance!

Nath
 
Hi guys

I am needing some help to set up my investing strategy.

I have explained our situation in a previous thread, http://somersoft.com/forums/showthread.php?t=108502.
We have approximately $350k in equity to get started with but would like to leave the current investment properties at an 80% LVR leaving us with $150 to spend on deposits.

We are still living in remote FNQ so it may be difficult but my plan is to start out purchasing properties in reasonable areas with reasonable growth and yield such as Logan, Slacks Creek, Woodridge in QLD, Elizabeth south or Salisbury North in SA, Moree & Albury in NSW etc etc. I want to target homes that need work as I am a builder and then renovate, hopefully buying below median house prices and then gaining equity and higher yield. Eventually doing more developments.

So I have a plan in place but everyone always says to start out you need to know where you want to be in 5-10 years time and then work out exactly what properties you need to acquire to get there (how much growth and rental income needed from each property). I think if I follow my plan above I will reach my goals but working out the numbers to get there is difficult as I cant plan how much a knocked around old home in Logan is going to sell for and then how much I need to spend on a reno without seeing the condition.

Iv done some BASIC figures below of an example without doing any renovation work or being active at all, but it looks like a very slow growth to get to where I want to be in 5 years time! Can any experienced investors have a look and tell me their thoughts and tricks:

$160k for deposits

Purchase four homes for $250k each and valued at that price.
Each home rents for $260p/w (lousy yield but worst case scenario)

Use LMI to borrow 88% (unsure of LMI cost so leaving it out)

Loan = $880k interest only, Deposits = 120k + costs = $160k

Rental income o/a = $54080 p/a
Interest o/a @ 4.7% = $41360 p/a
Insurance, managing fees, upkeep allowance o/a = $6326.4 p/a

Net Income from rent = $6393.6 p/a
5% (just an average growth) growth on portfolio = $50k

Now I have outlaid approx $40k in costs purchasing these properties (exc LMI) and I have gained $56393.6 before tax. I understand the following years profits will be excluding the purchase costs which is a bit better and the 5% growth in the following year will be calculated on $1050000.
So the following year I use the $50000 in equity I have gained to buy One more property. This year then looks like this:

Purchase 5th property for $250k at valued price.

Loan 88% interest only = $1100000
Deposit = $30k + costs = $40

Rental income o/a = $67600 p/a
Interest o/a @ 4.7% = $51700 p/a
Insurance, managing fees, upkeep allowance o/a = $7908 p/a

Net Income from rent = $7992 p/a
5% growth on portfolio = $65k

Second year o/a profit before tax = $72992. minus the purchase costs of Prop5.

If I then take the equity and keep purchasing by the 4th year I should be able to purchase two properties.

I understand this is a low Yield and 5% growth isnt amazing but I am no accountant so could someone please jump in and let me know where I am missing things? I want to be able to work out how much I need to be bringing in each year to get to my goals.
I understand newer homes have depreciation on the building and the furnishings which has been great for our first two investments but when spending $200 - $250k on homes they probably wont be new enough.

We want to be aggressive with our investing.

Thanks in advance!

Nath

your strategy does have its high risks and for such a low yield. What happens if you cant find tenants for any of the properties? Rate increases..

If you want to be 'aggressive' with your investing why not consider global shares? You would make a higher return on dividend yielding stocks in the domestic share market.

good luck
 
Doesn't look like you have factored rates
And water into it as well, at least is they we're Logan properties. Also won't find much now for 250k. Try 300+ and renting for 300-380
 
Aggressive not equal to risky.

Personally I would say doing a development or some sort is aggressive strategy

Eg sub dividing building when you are not a qualify builder.(high outlay for higher return)

Or buy 5 apartments off plan and on sell them before settlement

Passive strategy:

If u buy 2-3 houses rent them out waiting for a longer term capital growth.

Or Buy a house, do some Reno and rent it out or sell
 
Hi Nathan
looks resonable but as stated previously I cannot see any allowance for rates or water and the upkeep allowance for maintenance looks too low.
With cheaper possibly slightly older properties his can be highly variable think new fence, hot water system, airconditioner etc. Some investors are very tight in his area but unless the house is going to be demolished for future development at some point it is a false economy IMO. Poorly maintained become unloved, attract lower rents and can become very run down after a few years. I have read estimates that equivalent properties where one is oo and the other a rental can vary in value by 10-15%after 10 years partially due to lack of maintenance and care.
Your capital growth estimates might be slightly optimistic and you may be able to purchase with slightly better yields, but figures look reasonable.
 
You are assuming a 5% growth year on year - I am not sure this is very realistic over the long term: sure right now almost everything is trending upwards, but you are bound to have stagnant or negative growth years.
I think adding value through renovations is a great idea especially given you are a builder. I would focus on that to build equity if I was in your position rather than depending on the capital growth being 5% year on year. You know you will make some CG anyway, so it'll be a nice bonus, but you have the means to manufacture growth in a much more predictable and certain way, though renovation.
 
You've talked about renoing but I don't see that in your numbers. Are you mobile? Will you be able to buy / reno / hold? If so I would look to do so - buy / reno / hold / extract equity asap & go again. The numbers you have run do not use your greatest advantage IMO, which is that you are a builder and can therefore do much of the work yourself, thus keeping costs down and maximising the equity gain available. This would also give you scope to purchase at a higher price point which would give you more flexibility in locations. The starting point will probably be slower as you wont buy 4 houses straight up but if you choose the houses correctly I reckon you'd be ahead pretty quickly rather than just buy & hold.
 
I think an important thing you are over looking is that the $160k for deposits and costs you are getting from a refinance. Therefore you should add interest paid on this amount to your calculations and see that your investment choices are still viable. Not sure if you added the lending for deposits and costs to overall lending and repayments in the second year.

Keep in mind also that growth rarely occurs in a nice smooth 5% pa (or whatever) it usually goes in stops and starts, especially if you buy into only one market you might get no growth for a time.

As others have mentioned there are some additional costs you need to look at including.

Overall I like the steady buying approach and am employing it myself.
 
Thanks guys, let me know your thoughts!

Thanks for everyones feedback.

I suppose I put this thread up to get my thoughts out in front of me, I find this helps. As does everyones advice obviously. After writing it I then projected this pattern 6 years into the future using different yields but still the 5% growth P/A. And it was impressive at the 6 year mark.

I understand that a 5% CG year on year is unlikely, But to get something on paper I had to start somewhere.

I did not include any renovating or developing figures into these figures as I basically wanted to draw up a base scenario that I can improve on with selected properties (by actively creating equity) but still have the passive investing strategy there to fall back on.

I think I have allowed 8% for managing fees and a small amount for rates, insurance and a bit of maintenance. Can anyone share what I should be allowing. Just as an average...

I think I have forgotten to allow for the interest on redrawing for the deposits... Thats a big one..

Like a few people have said, I think my greatest asset will be the building background. I think I would do best buying in areas that have better CG and possibly even neutral cashflow to begin with and then renovate, up the rent (bringing it CF+) and re finance to then go again. Alot of seasoned investors are saying not to do this though as if the valuation doesnt stack up at the end of the reno ill be stuck. I think the old saying of buying the worst house in the best street should work for this strategy.. Any thoughts?

Nath
 
Nathan, since you are a builder and renovator, have you thought about buying highset or lowset properties in Logan then build a 70m 2 bedroom auxiliary unit on each property to increase cash flow and potentially property value. There is no minimum lot size to build an auxiliary unit which can either share a common wall with the main dwelling or be completely detached.

Under the new Logan Plan that just commenced on 18 May, you don't need to apply for a planning permit from Council or the help of a town planner, it is self-assessable. You just apply for a building permit and build the auxiliary unit on your Logan properties

There is not only Woodrige, Kingston, Logan Central, Slacks Creek to choose from although these suburbs are closer to the CBD
There is also Crestmead, Marsden, Waterford West, Loganlea, Bethania, Eden's Landing, Beenleigh

The above suburbs have quite tight vacancy rates and rental yields can be quite good.

There is also slightly to the West - Browns Plains, Regents park, Hillcrest, Heritage Park

Just throwing the idea out there as you are a builder, also there are investors in Logan (some on Somersoft) keen to build auxiliary units on their properties, could you make a business out of it?

Just giving some food for thought :)
Good luck with whatever you decide.
 
Nathan, since you are a builder and renovator, have you thought about buying highset or lowset properties in Logan then build a 70m 2 bedroom auxiliary unit on each property to increase cash flow and potentially property value. There is no minimum lot size to build an auxiliary unit which can either share a common wall with the main dwelling or be completely detached.

Thanks Beanie Girl

I did read your thread a week or so ago regarding the new planning scheme in Logan. It was an interesting read between yourself and retirerich.

I am definitely interested but of course have a few concerns that will require some due diligence.
Spending that sort of money to have two dwellings on one lot would have the benefits of positive cash flow but the resale market is limited as you cant sell the dwellings separately. (not that we want to sell any time soon)

Im also concerned of how many people will be doing this now throughout Logan. As Im not based in the area its a slow process for DD. Will there be an oversupply of these properties in Logan in the years to come pushing up vacancy rates?

Definitely worth looking into.

Thanks again Beanie Girl!

Nath
 
Nathan, since you are a builder and renovator, have you thought about buying highset or lowset properties in Logan then build a 70m 2 bedroom auxiliary unit on each property to increase cash flow and potentially property value. There is no minimum lot size to build an auxiliary unit which can either share a common wall with the main dwelling or be completely detached.

Under the new Logan Plan that just commenced on 18 May, you don't need to apply for a planning permit from Council or the help of a town planner, it is self-assessable. You just apply for a building permit and build the auxiliary unit on your Logan properties

There is not only Woodrige, Kingston, Logan Central, Slacks Creek to choose from although these suburbs are closer to the CBD
There is also Crestmead, Marsden, Waterford West, Loganlea, Bethania, Eden's Landing, Beenleigh

The above suburbs have quite tight vacancy rates and rental yields can be quite good.

There is also slightly to the West - Browns Plains, Regents park, Hillcrest, Heritage Park

Just throwing the idea out there as you are a builder, also there are investors in Logan (some on Somersoft) keen to build auxiliary units on their properties, could you make a business out of it?

Just giving some food for thought :)
Good luck with whatever you decide.
hey bg

so my understanding to what you are saying is to basically build a 70m2 cheap granny flat and stick in in the backyard?

not sure what the benefit of building something and sticking it to the main house unless you are referring to legal height downstairs properties

the way I see it auxillaries are good for CG for the area, but depending on the price it costs you, its basically like those building granny flats in Sydney a few years ago
 
hey bg

so my understanding to what you are saying is to basically build a 70m2 cheap granny flat and stick in in the backyard?

not sure what the benefit of building something and sticking it to the main house unless you are referring to legal height downstairs properties

the way I see it auxillaries are good for CG for the area, but depending on the price it costs you, its basically like those building granny flats in Sydney a few years ago

Actually, my advice was to Nathan specifically because he was looking to buy doer-uppers, maybe in Logan, for 250k to renovate. 2-3 properties. So I was wondering if he knew about the auxiliary units that could be built either attached to the main dwelling or completely detached. So he doesn't necessarily have to buy a doer-upper in Logan but could build detached auxiliaries to increase his cash flow and potentially property value. As he is a builder, he definitely could build these auxiliaries on his chosen properties more cheaply than you or I could do. I thought that could be a possible strategy that might work better for him than the ordinary investor (like me) who has to depend on others to build the auxiliary units :)
 
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