Can buy now but worried, advice please

Hi SS Gurus,

I need your advice regarding my current situation. you may have passed through the same situation before. I can get another loan, I can service another loan, but I am worried that I may be doing something wrong.

I just started investing in IP this year, I have the concept of buying cheaper properties that can be neutral to positive, so I went away from Sydney and bought in QLD. My strategy is to buy and hold for long time. My basic target is 12 properties totalling 3.5M, leave them to double, sell half and pay off the rest or leave in offset. 2 properties for the kids to help them start their life strong. and 4 fully paid for myself and my wife to live from the rent. I need around 1K in today's dollars a week.

I started my research last year, and this year I bought 2 properties in QLD. one in Logan- Waterford West for 290 renting for 350 (yes it is a bit high price, it is a 3,2,2 with 24meter frontage in a very clean and neat condition ? I was a bit emotional to be honest, but thank God tenants are very good and looks very well after the property), and one in Ipswich ? Bellbird park for 235 renting for 300. both houses. I am earning around 100K's and my wife around 30-40. We do not have any other dept., no car loans, no credit cards,?etc. we have done well with our PPOR, bought for 350 in 2011 valued at 550, remaining 165. Our target is to pay off our PPOR in the next 3 years :). My LVR is 68%.

I am not sure if I should go for another IP at the moment or not. I can still buy in the price range of 300K?s. I am worried that I may be doing something wrong and stretching myself so much. I have offset buffer to service all loans for 24 months on 7% Interest.

What is the safe LVR?. I am still learning. Until now, all looks good, both houses are rented to good tenants, I am not paying anything from my pocket until now, rent is covering the loan + council rates. also the 2nd house was well below the market value, so it is expected get around 30-40K when valuated.

I hope you can have a look and advise, as I want to proceed to purchase more properties, but a bit worried that there is something i am missing.

Also when will I hit the wall of no more loans for me?

Thanks
Ram
 
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Hi SS Gurus,

I need your advice regarding my current situation. you may have passed through the same situation before. I can get another loan, I can service another loan, but I am worried that I may be doing something wrong.

I just started investing in IP this year, I have the concept of buying cheaper properties that can be neutral to positive, so I went away from Sydney and bought in QLD. My strategy is to buy and hold for long time. My basic target is 12 properties totalling 3.5M, leave them to double, sell half and pay off the rest or leave in offset. 2 properties for the kids to help them start their life strong. and 4 fully paid for myself and my wife to live from the rent. I need around 1K in today's dollars a week.

I started my research last year, and this year I bought 2 properties in QLD. one in Logan- Waterford West for 290 renting for 350 (yes it is a bit high price, it is a 3,2,2 with 24meter frontage in a very clean and neat condition ? I was a bit emotional to be honest, but thank God tenants are very good and looks very well after the property), and one in Ipswich ? Bellbird park for 235 renting for 300. both houses. I am earning around 100K's and my wife around 30-40. We do not have any other dept., no car loans, no credit cards,?etc. we have done well with our PPOR, bought for 350 in 2011 valued at 550, remaining 165. Our target is to pay off our PPOR in the next 3 years :). My LVR is 68%.

I am not sure if I should go for another IP at the moment or not. I can still buy in the price range of 300K?s. I am worried that I may be doing something wrong and stretching myself so much. I have offset buffer to service all loans for 24 months on 7% Interest.

What is the safe LVR?. I am still learning. Until now, all looks good, both houses are rented to good tenants, I am not paying anything from my pocket until now, rent is covering the loan + council rates. also the 2nd house was well below the market value, so it is expected get around 30-40K when valuated.

I hope you can have a look and advise, as I want to proceed to purchase more properties, but a bit worried that there is something i am missing.

Also when will I hit the wall of no more loans for me?

Thanks
Ram

Hey Ram,

Good to be prudent and i like the buffer youve set aside, 2 years + is very healthy IMO.

To get to your goal, its likely yo'll need to be aggressive early and take advantage of LMI with higher LVR lending.

In terms of borrowing power, best to sit down with a broker and ask them to map out your path to 12.

Cheers,
Redom
 
I am not sure if I should go for another IP at the moment or not. I can still buy in the price range of 300K?s. I am worried that I may be doing something wrong and stretching myself so much. I have offset buffer to service all loans for 24 months on 7% Interest.

Hi Ram

That's fair enough.

Too often borrowers concern themselves with maximising the amount the bank will lend instead of focusing on what is actually affordable.

Have you done a household budget? Do you know where your money is going, how much you spend and how much you have available to go towards investments?

You've got a healthy buffer in the offset account - which is a really good start.

Cheers

Jamie
 
I think the best person to answer these questions is yourself. There's no right or wrong answers, just what you're comfortable with.

You've indicated there's 2 years of repayments in the offset account. This is more surplus cash than a lot of people I see.

Your LVR of 68% is quite low. In the worst case scenario if you had to sell you'd easily pay off the debt and have money left over.

It's unlikely that you'd need either of these two contingencies given the properties are paying for themselves. If anything I'd say you're being extremely conservative and this is more likely to hold you back.

You need to do your own budgets and be comfortable with that. I've got no doubt that the banks are likely to lend you more money than you personally would be comfortable with.

If anything, I'd suggest you're being very conservative in your approach. How quickly you invest has to be right for you of course, but if you want to build build a 12+ property portfolio, you're probably going to have to become a bit more aggressive.

How long it takes before you hit a wall will depend on your financial circumstances. Even then it's voodoo magic because we can't predict what properties you'll actually buy.
 
Yep - my thoughts are with a great buffer in place and a focus toward cashflow properties, you're in a very good situation risk wise. If you were neg gearing with no buffer (very common) you're setting yourself up for trouble.

When I'm feeling unsure, I like to run through a whole lot of "what if's'. What's the worst case scenario? If external, non-investment factors cause a financial upset for the family, how will I respond to that?

Knowing you have a plan in place for negative scenarios means that when they come (and I do mean when!) you just take action with your plan, rather than freaking out. :) MUCH less stressful.

And regarding your serviceability, speak with your broker about your life situation within that plan. For eg - if babies are planned at year 3 of your plan and you'll be heading to one income, plan for that with your purchases but ALSO plan for that with your overall portfolio in place.

What I mean is, do a rough budget based on that lower income so you can see early what life might look like with the added expenses of a family and reduced income. You might find that you want an extra "x" dollars set aside to fund a buffer for the family, as well, or that the properties will need to be bringing in "x" to maintain a comfortable lifestyle.

It will seem like overkill for many, but you are a conservative or nervous personality type it can bring a lot of peace of mind knowing that things have been planned and will be fine through changing circumstances.
 
Hi Ram

That's fair enough.

Too often borrowers concern themselves with maximising the amount the bank will lend instead of focusing on what is actually affordable.

Have you done a household budget? Do you know where your money is going, how much you spend and how much you have available to go towards investments?

You've got a healthy buffer in the offset account - which is a really good start.

Cheers

Jamie

Hi Jamie,
I have done my budget, my calculations are on 7%. I can service the current loans + one more at the moment. I keep the buffer as a disaster recover buffer.

I like Brisbane, and I am thinking to buy around Redcliffe. but Maybe this time, I will go to Adelaide to mitigate the risk, and split my portfolio across different states.

Thanks
Ram
 
Two sides to this though. Risk minimisation beyond a certain point starts becoming expensive.

Having a buffer is all well and good - definitely very healthy and prudent. Jamie makes a great point, relevant and timely given the 'mindset' towards property at the moment (boom times, happy days!)

But at the same time, that buffer out has an opportunity cost. It generally means relatively 'idle' equity not earning the return that it can generate.

Just balance this against your risk tolerance, and then make an assessment as to when you're ready to purchase. I think its safe to say that most successful property investors on here didn't get to where they got to without leveraging their way there.

Cheers,
Redom
 
That is a really good point Redom - there is a lot of opportunity cost in having a lot of cash.

It really is a balancing act - leverage vs SANF.

It sounds like there might be a money script or belief in there somewhere that is causing problems. For example, having 2 years of interest payments is one thing but if you feel that may not be enough, ask yourself 'What's making me think this?'

Often we have beliefs (and SO many surrounding money) that we are so used to having that we don't question them.

On one hand, you want 12 properties, on the other you have 3 and aren't comfortable. There's something incongruent there that needs to be worked out before you'll be able to get much further.
 
I generally advise to increase the size of the buffer depending on employment/lifestyle circumstance.

If I have a 24 year old doctor at the start of a career with strong income gains expected, low capital base, having a large buffer here can mean watching from the sidelines for years.

Comparatively, if I have a 30 year old self employed client with variability in income, kids on the way, etc - having a bigger buffer is necessary.

Stability in employment and lifestyle should also factor into your buffer assessment.

Cheers,
Redom
 
Yep -

What I mean is, do a rough budget based on that lower income so you can see early what life might look like with the added expenses of a family and reduced income. You might find that you want an extra "x" dollars set aside to fund a buffer for the family, as well, or that the properties will need to be bringing in "x" to maintain a comfortable lifestyle.

It will seem like overkill for many, but you are a conservative or nervous personality type it can bring a lot of peace of mind knowing that things have been planned and will be fine through changing circumstances.

Hi Jess,
Thanks for your response, your Comment and Peter's comments are very good. I maybe a conservative because I don't see the full picture yet. I am new to the game.

I will do some numbers about my wife's income, my kids are 8,6 years, so I do not want to budget my lifestyle. but I will re-think about reducing the buffer 12 months buffer, and use this money as a deposit for an additional IP

Thanks
Ram
 
I generally advise to increase the size of the buffer depending on employment/lifestyle circumstance.

If I have a 24 year old doctor at the start of a career with strong income gains expected, low capital base, having a large buffer here can mean watching from the sidelines for years.

Comparatively, if I have a 30 year old self employed client with variability in income, kids on the way, etc - having a bigger buffer is necessary.

Stability in employment and lifestyle should also factor into your buffer assessment.

Cheers,
Redom

Hi Redom,
Thanks for your response. it is really helpful. I work as an IT Consultant. I work for multinational organizations, so I am a bit stable, even if I will go, I will be safe with redundancy packages.

my initial through was to keep paying my PPOR until it is paid out. and then I can go for contracting, as higher income, but more risk. so with my income less home loan. I can survive without income between contracts.

I will re-think about the whole strategy now :)

Thanks
Ram
 
If your LVR is not more than 80% i would go ahead further. Will never borrow more than 80%.This is assuming that you keep a buffer too. That is what i have done in my case. Cheers
 
In any game whether its property or business Cash is king. Having a buffer is a must for any prudent investor.

Even when I set my clients up for retirement we always have a cash buffer to protect their cash flow needs.

New investor, do your numbers and remember its a learning experience and your journey is unique to you. Somethings might scare you but you do it anyway. I like your attitude of having a cash buffer and yes although it may stop you from getting the maximum loans or the next best deal. You are executing a long term strategy not a 12 month one.
 
Hi Ram,

Your strategy sounds ridiculously similar to mine. I have more debt on my PPOR but also some good equity to use. I'm 35 and have 4 IPs so far, but looking to get to 10 - 12 in coming years.

We're at the stage now that we're seriously considering our buying structure. Everything is in my name or my wife's name so far, but we're just about to hit the NSW land tax threshold (already paying it in Canberra because there is no threshold).

Have you considered what your structure will be like moving forward ie (trust, own name etc)? Also the suggestion of talking to a broker or bank and nutting out a pathway to purchasing the 10 - 12 properties is a good one. We've done this and we're pretty clear about what we can achieve - just need to pull my finger out and do it!! :D

All the best with the journey
 
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