CF +ve in Perth/WA....Thing of the past?

[<KS>]

Just occured to me after making comment in another thread that I have not seen a truly CF +ve property for quite a while now - not in the Perth area anyway.

I know of lots in Karratha and other mining districts but thats about it.

Has anyone had such luck finding such a property from a regular sale (not deceased estate or mortgage write off) in the past few months?

And if you have - did the job require a reno to boost rental yield?

I mainly post this thread because this recent 5 year boost in the market value of houses has increased rents, but no where near proportionate to the property value increase. I have a property that has doubled in value in 4 years - but the rent has only increased by $20, and I cant push it any further.

If you answer yes, please give as much detail as possible as to how you achieved it - I refuse to believe all the bargains are gone!!

<KS>

 

[D.T.]

Hiya Bryn,

*refrains from bringing up the capital growth debate*

 

[<KS>]

Hiya Bryn,

*refrains from bringing up the capital growth debate*

lol

But this does not help those who cannot expand their portfolio due to lack of CF

It's great if a potential buy will double in value in X years - but it means nothing if you cant make the repayments.

*has opened a can of worms*

<KS>

 

[Pete]

KS,

There are two matters here.

The original question, positive cashflow properties around Perth; I don't know about this. (I would guess that this is fairly easily achievable for tax payers by negative gearing & having enough non-cash deductions. This is commonly advertised in the weekend newspapers. Such as Mark Hay, in Perth, selling units. I recommend you avoid such mass marketed schemes.)

Secondly, expanding a portfolio without cashflow. This is possible; use equity.

A property doubling in value means lots of equity; convert this to CF and keep buying. It can "snowball" superfast & dwarf other CF sources.


As an aside, a matter of terminology. "Repayments" to me suggests that loan principle is being paid back. With interest only loans, it would seem to me to be more accurately a "payment", or "loan payment", or "interest payment". The requirement is not to repay the loan only service it - meet the interest payments. I assume you're using interest only loans.

regards,

 

[<KS>]

The question is how do you turn this equity into CF?

The amount of equity you create is never equal to the sum of the total needed to buy a new IP - so what can you do do increase CF?

For example - I am about to spend @260k building a property. That leaves me with about $165,000 in equity in my portfolio.

Now banks like you to have 20% equity aside to avoid needing MI - so I now have about $115,000 available to me.

Is there anything out there that will give me a CF return with $115,000 that will more than pay off the $260,000 loan? If not then my CF is actually decreasing not increasing and I dont see how equity can boost my CF.

My portfolio can be expanded but eventually I wont be able to cover the interest payments when it gets too big.

<KS>

 

[Pete]

KS,

I don't understand your post. I offer some comments to some of your points.

How do I turn equity into cashflow - borrow against the equity and then use those funds. Or one could go the cashbond immediate annuity route. These have been discussed in a number of threads. Try looking in the property finance section.

"The amount of equity you create is never equal to the sum of the total needed to buy a new IP ..." I don't understand. Why can't it be equal, or exceed, the cost of an IP?

"My portfolio can be expanded but eventually I wont be able to cover the interest payments when it gets too big." I don't fully understand again. You'll reach your limit eventually, OK. Then simply wait for more growth. This surplus equity will allow further borrowings that can then service further debt. Consider when the portfolio value increases $1,000,000 since you were at your limit. You can borrow $650,000 "no doc". (Incidentally, this value can equal/exceed the cost of an IP.) If you used some as a deposit, the balance can service new loans.

I think this is may be easier to address at the meeting in a few weeks.

regards,

 

[<KS>]

KS,

I don't understand your post. I offer some comments to some of your points.

How do I turn equity into cashflow - borrow against the equity and then use those funds. Or one could go the cashbond immediate annuity route. These have been discussed in a number of threads. Try looking in the property finance section.

"The amount of equity you create is never equal to the sum of the total needed to buy a new IP ..." I don't understand. Why can't it be equal, or exceed, the cost of an IP?

"My portfolio can be expanded but eventually I wont be able to cover the interest payments when it gets too big." I don't fully understand again. You'll reach your limit eventually, OK. Then simply wait for more growth. This surplus equity will allow further borrowings that can then service further debt. Consider when the portfolio value increases $1,000,000 since you were at your limit. You can borrow $650,000 "no doc". (Incidentally, this value can equal/exceed the cost of an IP.) If you used some as a deposit, the balance can service new loans.

I think this is may be easier to address at the meeting in a few weeks.

regards,

YUP

This is actually one of the main things I want to discuss at the end of the month - Kenneth currently lives purely on his equity and you yourself seem well versed in using equity for more than just leverage.

/me cant wait for the meeting

Roll on the 27th!!

<KS>

 

[Quick Learner]

cashflow +ve

With No/low money down I have not seen any cashflow +ve properties. I'm sure that prior to the recent boom suburbs further out of Perth towards Rockingham would have been cashflow +ve. I am typically seeing no greater then a 5% yield in all the areas I have investigated.

Regards,
Jarrad

 

[Pete]

Gee, Jarrad, posting "on topic". Thank you.

Another off topic comment for KS; something to think about in preparation for the meeting. Homework? How do you plan to live (financially) from your portfolio when you stop work?

 

[<KS>]

Gee, Jarrad, posting "on topic". Thank you.

Another off topic comment for KS; something to think about in preparation for the meeting. Homework? How do you plan to live (financially) from your portfolio when you stop work?

/me runs away from Pete!!

Hey I graduated already man!

HOMEWORK - dont speak such foul language around me!!

Fair call though - I guess we should all compile a list of thoughts/discussion points etc.

<KS>

 

[Pete]

KS,

No need to get too formal. It is primarily a social get together; though will be largely property focussed. I was more thinking if using equity was something you wanted to know more about, then it'd be valuable to clarify your strategy. I'm very focussed on capital growth, so what suits me may not suit you........ (Hence my earlier question, what will be your long term strategy.)

regards,

 

[Rixter]

Howdy fellow Perthites,

My end goal is the same as Petes - Converting Equity into Cashflow for the purposes of funding my lifestyle & further investing, either by LOC, Cashbond or both. The strategy Im using to aquire the equity in the first instance is one that I have tailored and given it the name of Growth Cycle Averaging ( GCA ).

With out too much detail its basically a mix strategies being long term Property buy and hold, and a Stock Market Strategy call Dollar Cost Averaging where by you continually buy a stock over time but averages out your Capital Growth over a property cycle instead of a share cycle.

It is not a mix of Shares and Property tho. It is applied to Property purchasing but incorporates a share strategy and I have applied to to property purchasing.

 

[Peter Parker]

With out too much detail its basically a mix strategies being long term Property buy and hold, and a Stock Market Strategy call Dollar Cost Averaging where by you continually buy a stock over time but averages out your Capital Growth over a property cycle instead of a share cycle.

To expand on this, wouldn't this only work properly if:

a. you have a regular buying program (at least one IP per year) and
b. spend about the same much per year (whether it's on one, two or three IPs is immaterial)?

Thus if you set a constant $100k pa buying budget and started in 1995, you'd be buying capital city IPs until around 2000/1. By then your $100k wouldn't buy much in the 'good' suburbs, so you'd have little option but to buy outer suburban and then regional.

If done over the last property cycle, growth would have been good and yields neutral if not positive. The approach would have been highly successful.

But if property goes through a long flat or slow spot (as is quite possible), then I can't see any benefit of dollar cost averaging until the following boom.

Also there is a danger that during a boom you are forced pay more than the set $100k per IP. Then you are no longer 'buying a lot when prices are cheap and buying a few when prices are dear' and are instead following the cycle, spending most of your money when most others are, too.

Regards, Peter

 

[Pete]

Hi Rixter,

If the end goal is to convert equity into cashflow, what are your preferred strategies to maximise equity creation? Such as developments, renovations, land for future subdivision, etc.

For me, in the few years I've been serious about property investing, I've had good success buying near the beach -towards Mandurah.

It is interesting to learn of each person's different approach.

regards,

 

[odaat]

KS,

I don't understand your post. I offer some comments to some of your points.

How do I turn equity into cashflow - borrow against the equity and then use those funds. Or one could go the cashbond immediate annuity route. These have been discussed in a number of threads. Try looking in the property finance section.

"The amount of equity you create is never equal to the sum of the total needed to buy a new IP ..." I don't understand. Why can't it be equal, or exceed, the cost of an IP?

"My portfolio can be expanded but eventually I wont be able to cover the interest payments when it gets too big." I don't fully understand again. You'll reach your limit eventually, OK. Then simply wait for more growth. This surplus equity will allow further borrowings that can then service further debt. Consider when the portfolio value increases $1,000,000 since you were at your limit. You can borrow $650,000 "no doc". (Incidentally, this value can equal/exceed the cost of an IP.) If you used some as a deposit, the balance can service new loans.

I think this is may be easier to address at the meeting in a few weeks.

regards,

Pete,
I would liked to have met and networked with you and other Perthites on the 27th - seems good info will be circulated and I strongly advice Perthite IP people to attend.

My question would have been similar to KS -

I.E., How to turn equity into cashflow and purchase further IP in Perth at this time in the cycle when 3 x 1 IP properties cost $250K+ , with less than 4% gross yields ?.

for a novice like me, what would you do in the following "case study scenario" ?

Aim -
1. Build a $2.5 million residential portfolio investing $30K p.a. x 10 yrs
2. portfolio to be 5% net cashflow positive in 10 yrs.
3. Work overseas and do not pay tax.
4. Do not require income from IP for x 10 years.

At present :-
3 x1 property value = $250K
repayment mortgage remaining = $60K @ 7.5% interest rate
$50K cash available to start investing.

a. What can I buy in Perth with released equity that gives 5% yield ?
b. Do I rely on capital gain to release further equity + continue with my aim ?
c. What are the alternatives ?

Hope you have time to reply to the example, or please discuss at the meeting on 27th,

Regards
odaat.


Advice appreciated
odaat

 

[Rixter]

Hi Pete & Spiderman. Im away at the moment but will answer your questions in more detail in the next day or so.

 

[Pete]

odaat,

Your post does offer a few questions; I do not have time to fully address the questions; and probably a little more info would be needed to be able to give good answers.

Actually, the idea of posting some sort of solution is overwhelming. There are so many factors. Excellent books have been written by various people and it seems that everyone has a slightly different approach to property investing. I think it would not be possible for me to fully answer your post.

I would suggest that each person needs to find what works for them.

Some comments.

1. Input 30k per annum. After tax or before tax $. What about growth with time?

2. 5% net cashflow positive target. So you're targetting cashflow positive?

3. Work overseas and do not pay tax. You appreciate that one does not have to work overseas to not pay tax?

4. "What can I buy in Perth with released equity ..". I do not understand "released equity".

5. "Do I rely on capital gain ...". What is YOUR strategy?

6. "What are the alternatives ?" Where does one even start to answer such a question?

7. With a 250k property, 60k debt & 50k cash my simplistic calculations using limiting LVR 80% suggests, subject to serviceability, you could go and buy about 3 more such properties.

odaat, I don't expect a reply to the questions above; even with answers, I can't give you some sort of recipe for success.

I suggest if you strive to develop your own knowledge and strategy that, with time, the path that suits you will be clearer.

Please don't be put off asking questions. I can't answer everything in an email or two. I'm happy to discuss the topics face to face sometime; that would be much easier. It may take years to work out your strategy, BTW. (Even then, it will change with time ....)

Best wishes on the journey.

regards,

 

[<KS>]

Please let me know if tyou agree with the following CF solution - and chip in any thoughts.

============

I will soon have a total of $350,000 in mortgages.

I will have a total portfolio value of $500,000.

Minus my 20% safety net, my available equity on a LOC is about $100,000.

My Yearly interest calculated on 7% of 350k = $24,500 (-ve)

My Estimted rental income from both properties = $19,760 (+ve)

My Yearly rates, strata fees etc (rough) = $3400 (-ve)

Total Cash Flow = -$8140/Year

=======

So I need to know what I can do with that $100,000 available to me in my LOC that will turn my -ve cashflow into positive cashflow - either through a managed fund or whatever else.

The Navra Fund boasts a 20% compounded return - which would look like this:

20% on 100k = $20,000
minus
7.5% on 100k LOC = -$7500
= +ve $12,500 CF

-$8140
+$12,500

Grand Total CF = +ve $4360 + Tax Benefits

==========

Would that be acccurate/ball park?

<KS>

 

[Pete]

KS,

The mist of misunderstanding clears a little. Maybe.

Your available equity on a LOC is 100k. That bit I don't understand.

AVAILABLE equity is equity not already borrowed against. It seems like you're using the whole equity; not all of which is available. Can you please clarify how you calculate the "available equity on a LOC is about $100,000"?

[Added in later: KS, I may be totally off track here. Please let me know. I've realised later that I might have misinterpreted your LOC. Is it an unused part of the total $350,000 mortgages? If I've misinterpreted things, the rest of this post - talking about how to use equity - is even further off track. Sorry! It might be time to start a new thread in the right section, too; and abandon this one. Pete]

By way of explanation, process is, neglecting for this exercise the safety net - though it is important - as follows,

500k portfolio.
For example only, LVR limit is 90%.
Then can borrow to (500k x 90%=) 450k.
Have existing loan 350k.
So, get new loan for 100k.

Say use 50k as deposit on new IP and use the other 50k to help service the loan. Obviously this is risky! In reality, I'd avoid such a strategy on these numbers.

Again, just by way of example and picking some bigger numbers (as this is really for when you have lots of equity) to demonstrate, say the portfolio was $2,500,000 and income allowed only serviceability of the $350,000 presently borrowed. However, one can "no doc" borrow to 65%, that is $1,625,000. With existing debt $350,000 that means a new loan of $1,275,000.

Then use $350,000 from the new funds as deposit for "no doc" lending on $1,000,000 of new IPs - hence another new loan for the other 65% or $650,000.

So the $1,275,000 has $350,000 taken for deposit, say $50,000 for purchase costs and $1,225,000 left.

This $1,225,000 can be drawn down as required to meet interest payments on all other debt.

OK? I hope that is clear. The numbers are to demonstrate the idea, not real or recommended.

 

[<KS>]

hehe - I made a mistake in my example also....

I can see us talking about this a lot on the 27th

My TOTAL Debt is $350,000.
The value of the properties I own is $500,000

That is a difference of $150,000-----> Equity.

Now Banks wont let you go over 80% LVR without mortgage insurance or a VERY impressive investing record.

This leaves me with $50,000 I can withdraw using an LOC against the value of the properties. 500k x 0.8 = 400k - 350k = 50k available.

So I can now use that 50k in whatever venture I want to make more money. Buying more property is one way - but that increases my debt to a point that it is getting hard to service...UNLESS I manage to find a property that is cashflow neutral or positive, which is not easy.

So I can put it instead into a fund etc. which earns a higher % then the % I am being charged for the LOC, thereby increasing my cashflow.

Typical LOC % rate = 7.2%
A good fund % rate = 16-22%

U dig?

<KS>