CGA - Rixter or others

[steveadl]

I was just looking back at an old post by Rixter that someone linked to in another thread and I like the strategy, but I have a quick question:

For ease of calculation lets say we buy a property for $250k, so in 10 years its now worth $500k. Now lets say we do that each year for the next 7-10 years. Now you can quit the rat race.

So in year 11 ( 10 years since your 1st Ip) you have 250K equity in IP1 you can draw out (up to 80%) Tax free to fund your lifestyle or invest with. In year 12 you do exactly the same but instead of drawing it from IP1 you draw it from IP2. In year 13 you do the same to IP3, in year 14 to IP4, etc etc etc. You systmatically go right through your portfolio year by year until you have redrawn from each property up to year 20.

Does this assume that you dont' use any equity from the previous IP's to buy the next IP? Otherwise at year 11, IP1 will be at 80% LVR because you keep using the increasing equity to buy the following IP's? ie. so you have to buy each IP @ 80% LVR then leave it alone and not tap into the equity that accumulates?

Cheers
Steve

 

[Les]

G'day Steve,

That's a damn good question. I'm sure Rix has the answer for you, and I think I can guess at it, based on my own observations.

Thoughts - I think that is one of the dangers of "keeping things simple". The idea has merit, (and may well be attainable after Year 10), but, in my observations, it usually goes something more like this:-

Yr 1 - Buy your first (and maybe your 2nd) using PPOR as dep/costs
Yr 2 - Your wage rise allows you to buy another (all 3 in Area A)
Yr 3 - Area A is stalling, but you chase other areas thru SS - buy one in B.
Yr 4 - You have a child, and this stalls your progress for a bit....
Yr 5 - Area B cranks, it's growth allowing you to borrow for one more deposit. The Bank said "No more", but you have (by now) found a good Mortgage Broker who knows how things can work.
Yr 6 - Area A sees rental growth - you benefit from 3 increased rents (DSR)
Yr 7 - Growth of 5 IP's allows purchase of two more (in Area C)
Yr 8 - Area C booms, you buy 2 more (thanks to your MB's loan expertise)
Yr 9 - You hold 9, Area C is still booming, and Area A is climbing too - you buy another in a new (up and coming) Area D.
Yr 10 - Area C has doubled in value in 3 years - Area A has grown too (took it a while). Rents have grown, equity has grown - your LVR, which had hovered around 80 - 85% for the first 8 years, has shrunk to 65%.

So, where are you? Well, the 2 you bought in Area C in Yr 7 each have LVR's of 60% (even after using their equity in Yr 8 - remember, Area C doubled in 3 years!! Area A hasn't doubled yet !!) It's Yr 11 - you borrow living costs against one of your Area C props, Yr 12 you borrow against the 2nd Area C prop.

Yr 13, Area A has now doubled - ushering in Rix's CGA principle.

Yeah, I know, it's all BS - but posted to show that "things just happen". You MIGHT buy perfectly from Day One, and you MIGHT have enough to not need to borrow against other IP's - or, it might well work out just like above (i.e. you WON'T be able to borrow against IP1, but IP7 is "up there" when Yr 11 comes...)

There is no rule book - except, if you don't invest, you won't be reaping too many CGA's (however they ACTUALLY work out on the day....)

Let's see what Rix says (I'd be more inclined to listen to him, as he's done it - I haven't yet, but it's getting closer....)

Regards,

 

[Watermelon Man]

G'day Steve,

That's a damn good question. I'm sure Rix has the answer for you, and I think I can guess at it, based on my own observations.

Thoughts - I think that is one of the dangers of "keeping things simple". The idea has merit, (and may well be attainable after Year 10), but, in my observations, it usually goes something more like this:-

Yr 1 - Buy your first (and maybe your 2nd) using PPOR as dep/costs
Yr 2 - Your wage rise allows you to buy another (all 3 in Area A)
Yr 3 - Area A is stalling, but you chase other areas thru SS - buy one in B.
Yr 4 - You have a child, and this stalls your progress for a bit....
Yr 5 - Area B cranks, it's growth allowing you to borrow for one more deposit. The Bank said "No more", but you have (by now) found a good Mortgage Broker who knows how things can work.
Yr 6 - Area A sees rental growth - you benefit from 3 increased rents (DSR)
Yr 7 - Growth of 5 IP's allows purchase of two more (in Area C)
Yr 8 - Area C booms, you buy 2 more (thanks to your MB's loan expertise)
Yr 9 - You hold 9, Area C is still booming, and Area A is climbing too - you buy another in a new (up and coming) Area D.
Yr 10 - Area C has doubled in value in 3 years - Area A has grown too (took it a while). Rents have grown, equity has grown - your LVR, which had hovered around 80 - 85% for the first 8 years, has shrunk to 65%.

So, where are you? Well, the 2 you bought in Area C in Yr 7 each have LVR's of 60% (even after using their equity in Yr 8 - remember, Area C doubled in 3 years!! Area A hasn't doubled yet !!) It's Yr 11 - you borrow living costs against one of your Area C props, Yr 12 you borrow against the 2nd Area C prop.

Yr 13, Area A has now doubled - ushering in Rix's CGA principle.

Yeah, I know, it's all BS - but posted to show that "things just happen". You MIGHT buy perfectly from Day One, and you MIGHT have enough to not need to borrow against other IP's - or, it might well work out just like above (i.e. you WON'T be able to borrow against IP1, but IP7 is "up there" when Yr 11 comes...)

There is no rule book - except, if you don't invest, you won't be reaping too many CGA's (however they ACTUALLY work out on the day....)

Let's see what Rix says (I'd be more inclined to listen to him, as he's done it - I haven't yet, but it's getting closer....)

Regards,

Interesting scenario. Thanks for sharing!

 

[steveadl]

Hey Les, thanks for that.

Basically the principle I guess is the more IP's you get over time, the more equity you'll build up, and so even though you may tap into them for the next IP, your overall LVR will still get lower and lower the more IP's you have as the growth keeps happening over an expanded base.

Yr 5 - Area B cranks, it's growth allowing you to borrow for one more deposit. The Bank said "No more", but you have (by now) found a good Mortgage Broker who knows how things can work.

I also like this line you had, gives me some hope! At the moment the last deal I did, my mate at the bank said I was pushing it and he had to pull some strings to get it through - so I think next time I decide to make a move I may have to get some advice from SS as to alternative sources of finance and brokers etc. which is a shame as I like the idea of having everything with one FI.

Cheers
Steve

 

[Rixter]

Does this assume that you dont' use any equity from the previous IP's to buy the next IP? Otherwise at year 11, IP1 will be at 80% LVR because you keep using the increasing equity to buy the following IP's? ie. so you have to buy each IP @ 80% LVR then leave it alone and not tap into the equity that accumulates?

Steve,

In the beginning I used to cross collateralize my first few IP's against my PPOR, borrowing 106% of the IP purchase prices.

This 106% being 100% purchase price, 5% purchasing legals & costs, and 1% surplus drawings which was my cash flow piggy bank should I be taking vacant possession at settlement and/or any unexpected repairs/maintenace.

I targeted areas with the view of them providing me very good short to mid term capital growth in order to leverage against and build a portfolio asap.

I looked to where the Govt, Commercial/Retail, and private sectors where injecting money. Areas with govt redevelopment authorities having been formed to over see massive regentrification. This beautifies and up lifts an area and becomes attractive so people start moving in. Once you see those sectors coming into an area and spending BIG Dollars you can fairly well be assured of growth.

These big multi-national companies spend $millions on market research prior to entering an area. If those researched didnt indicate strong enough demand for their products/services they would not be moving into the area either,

After a couple years when those IP's grew in value so that the IP loans had become <80% LVR, I approached the bank and they released the extra security I used at the time of purchase to secure the loan.

The loans then became uncross collateralized and stand alone self secured. ie 1 loan secured by 1 IP.

Since then I now use a LOC secured against my PPOR for the 20% IP deposits and costs and borrow the remaining 80% secured against new IP purchases themselves.

These loans are pure equity lends as I do not provide any income, assets or liabilities to the lenders. aka No Doc.

Hope this helps to answers your query.

 

[steveadl]

Thanks Rixter, I like the fact that so far I seem to have made the same moves as you. Been buying in high capital growth area with IP's financed through equity in PPOR, and also the previous IP.

At the moment they're all at about 100% LVR, and still hoping to buy another one next year and develop an existing one if possible - I'm still at the beginning of your strategy, buy as many as possible early on so I can wait for the capital gains later on.

I definitely like your strategy!

Cheers
Steve

 

[DavidMc]

Yr 1 - Buy your first (and maybe your 2nd) using PPOR as dep/costs
Yr 2 - Your wage rise allows you to buy another (all 3 in Area A)
Yr 3 - Area A is stalling, but you chase other areas thru SS - buy one in B.
Yr 4 - You have a child, and this stalls your progress for a bit....
Yr 5 - Area B cranks, it's growth allowing you to borrow for one more deposit. The Bank said "No more", but you have (by now) found a good Mortgage Broker who knows how things can work.
Yr 6 - Area A sees rental growth - you benefit from 3 increased rents (DSR)
Yr 7 - Growth of 5 IP's allows purchase of two more (in Area C)
Yr 8 - Area C booms, you buy 2 more (thanks to your MB's loan expertise)
Yr 9 - You hold 9, Area C is still booming, and Area A is climbing too - you buy another in a new (up and coming) Area D.
Yr 10 - Area C has doubled in value in 3 years - Area A has grown too (took it a while). Rents have grown, equity has grown - your LVR, which had hovered around 80 - 85% for the first 8 years, has shrunk to 65%.

So, where are you? Well, the 2 you bought in Area C in Yr 7 each have LVR's of 60% (even after using their equity in Yr 8 - remember, Area C doubled in 3 years!! Area A hasn't doubled yet !!) It's Yr 11 - you borrow living costs against one of your Area C props, Yr 12 you borrow against the 2nd Area C prop.

Yr 13, Area A has now doubled - ushering in Rix's CGA principle.

Damn it - I forgot to have a kid in year 4! Better go visit the girlfriend tonight

(Nice summary BTW Les).

 

[Les]

Damn it - I forgot to have a kid in year 4! Better go visit the girlfriend tonight

Hope you're not too late, Dave,

Regards,

 

[redwing]

I wasn't sure I got year 4 right..so I had a couple more shots at it


Looking to take more equity out for the next one in 07-08 (In case you're not sure...I mean a new IP)

 

[mja]

Nice one Les.

 

[The Fisherman]

Steve,


I looked to where the Govt, Commercial/Retail, and private sectors where injecting money. Areas with govt redevelopment authorities having been formed to over see massive regentrification. This beautifies and up lifts an area and becomes attractive so people start moving in. Once you see those sectors coming into an area and spending BIG Dollars you can fairly well be assured of growth.

These big multi-national companies spend $millions on market research prior to entering an area. If those researched didnt indicate strong enough demand for their products/services they would not be moving into the area either,


Hope this helps to answers your query.

Using others to pay for your R&D, great idea.

Hi Steve, hope you don't mind me asking a Q here.

Rixter did you look at yield to help cover holding costs or did you focus mainly on capital growth and capitalise your holding costs?

Thanks
Darren

 

[steveadl]

Using others to pay for your R&D, great idea.

Hi Steve, hope you don't mind me asking a Q here.

Rixter did you look at yield to help cover holding costs or did you focus mainly on capital growth and capitalise your holding costs?

Thanks
Darren

How dare you hijack my thread Darren!

LOL Nah, good question mate!

Probably been talked about lots, but I thought the ATO doesn't look favourably on capitalising your holding costs? (If I am thinking of the right term ie. increasing the tax deductible amount beyond the original purchase price and fees - or am I thinking of something else?)

 

[The Fisherman]

Hey Steve, cheers mate.

I was thinking LOC against PPOR initially and then against IP as they increase in value. And only costs your regular income doesn't cover when you have low yield properties.

Darren

 

[steveadl]

I'd definitely agree with the LOC's on the IP's. At the moment I still have my PPOR on a traditional P&I Loan, but in the future may look to change to a LOC. Just not sure how that works with claiming for tax though ie. if debt on PPOR is $100k then increase that to $150k in an LOC for investment purposes (ie. IP shortfall) - only $50k of that is deductible. Which would probably cause my accountant to give me all sorts of dirty looks

I've currently got LOC's on all the IP's and have kicked in extra cash for any shortfalls, haven't capitalised any expenses as I'm not sure how it works?

 

[steveadl]

Hey Darren, just re-read again. Excuse my ignorance - but is this what you mean:

IP's come up with an annual shortfall eg. $2k pa per IP
Have LOC on PPOR which you can draw down to cover $2k shortfall
This $2k draw down then becomes tax deductible

Is this right or am I totally misunderstanding??

 

[The Fisherman]

Steve yeah except the LOC is set up against equity in your PPOR and seperate to your P&I home loan. This LOC would be purely for IP deposits and expenses to keep your deductible debt seperate from your non deductible debt.
Happy tax man .

And mate I'm not an accountant, just here throwing out ideas and asking questions like yourself. Would hate to lead you down the garden path.

Darren

 

[steveadl]

That's alright mate, just trying to get it clear in my head.

Similar to LOE - either way you're drawing down on PPOR/IP's to finance living/investment expenses.

 

[Rixter]

Using others to pay for your R&D, great idea.

Yeah mate. Investing is all about leveraging your time and other peoples finances as well.

I'm sure the government, commercial, retail, and big private sectors have a lot bigger budget than us that allows them to commission the services of professional full time agencies to conduct the DD and research on their behalfs.

Rixter did you look at yield to help cover holding costs or did you focus mainly on capital growth and capitalise your holding costs?

Obviously you should always work towards maximizing your yields.

GCA is ultimately a LOE strategy. There fore you need to target areas where property is going to provide you enough capital growth to leverage against and redraw portfolio equity out of down the track. So that is the main focus.

When I started out I had no real portfolio equity behind me to allow me to use as another form of income buffer so I looked for yields where by the purchases were cash flow neutral/positive after tax. I used a formula of Rent x 800 = Top Purchase Price to pay. This provided me a 6.5% Yield.

Properties Im purchasing now are intially slighty cashflow negative however due my equity portfolio levels these days I have the luxury to fund the short term slight cash flow loss by capitalizing it using my Investment LOC.

As time goes by and rents increase the loss turns to neutral and eventually positive.

Hope this helps.

 

[The Fisherman]

Nice one!

Yes it provides another piece to the puzzle. Thanks for having the patience to explain.

Darren