Developing an Investment Strategy

[ramssss]

If you were in my shoes, how would you structure a property investment strategy for the following situation?

The main thing that has been holding us back in our investment journey is a clear strategy. Being risk adverse and analytic by nature, I find it very difficult getting into something without clear understanding of all the steps from entry to exit. I don't have a mentor, nor have access to network of like minded people. There is a wealth of knowledge in this forum, hoping to leverage your collective wisdom to help us structure a strategy that is right for our needs.

Situation/Scenario

• 30 yo, single income family with two young children
• Upper tax bracket (>180k)
• 400k PPoR loan @ 30% LVR
• Zero IP
• Zero consumer debts/loans
• 50-70k cash set aside for property investment

Investment Goals

• In 10 years time, progressive access to $200-300k worth of equity to fund children's private education.
• In 20 years time, passive annual cash flow of $50-80k of 2014 money.

Constraints

• Very time poor. I work very long hours + weekends, which to me rules out DIY reno and, to a certain extent, development strategies. Occasionally I can take time off work to fly, inspect and investigate different markets.
• Resi markets that I'm a little familiar with are Melbourne and Perth.

Are these goals realistic given our constraint/resources? Am I left with a standard buy and hold strategy? Sacrifice yield for capital growth in the near term? At what year in the journey should I consider setting up a discretionary trust? How would you structure a strategy in this situation?

 

[nhg]

What are your expenses like?
$200k hard cash assets seems pretty low for a >$180k income.

That might be a place to start.

Next is, what are your end goals? Retire at... have assets/income of X by... etc.

$50-80k of 2014 money is pretty simple. Buy 3 houses, build 3 granny flats, pay it down over <10 years and finished. Cost ~1.2M needed (will snowball quickly as your income reduces the debt and the rents go up over time).

Buy and hold prime development land might be a little more ambitious. Depending if your lifestyle can handle it.

 

[ramssss]

We've estimated our living expenses at around 50kpa.

I do have some share portfolio, the rest of our asset is equity in the PPoR. How did you get 200k asset btw? I thought 900k worth of equity in our PPoR counts for something.

In addition to the above goals, I'm hoping to retire in around 15 years with PPoR paid off. If the property investment portfolio yields me $50-80k pa of today's money then I'd be happy. That means around $3m of accumulated asset. Focus then is on wealth transfer to the next generation.

Granny flat is a great idea. Given the 10 year horizon to extract some equity, would you build the granny flat early/later in the acquisition phase?

 

[D.T.]

We've estimated our living expenses at around 50kpa.

Is this for both of you or each?

You mention your income of >180k but not the partner's.
Assuming you make north of 250k between ya's, and your living expenses are 50k pa, how do you not have north of 200k in available cash?

 

[nhg]

I do have some share portfolio, the rest of our asset is equity in the PPoR. How did you get 200k asset btw? I thought 900k worth of equity in our PPoR counts for something.

400k PPoR loan @ 30% LVR
Zero IP
Zero consumer debts/loans
50-70k cash set aside for property investment

I read it as 30% of $400K loan is $120k + $50-70k cash = <$200k.

Granny flat is a great idea. Given the 10 year horizon to extract some equity, would you build the granny flat early/later in the acquisition phase?

I personally think this is far from a great strategy. However, with your cashflow, buy and build straight away on the lower - mid end of the market and just pump cash into paying off the debt.

In 10 years, with the snowball effect of the strategy, you should be able to buy a 4th and possibly 5th place. Income of $150k Gross.

A better strategy for you would be, subdivide and build houses (not granny flats). The depreciation of the building against your income would be a huge plus. A quality BA would be helpful in sourcing these properties.

 

[ramssss]

Is this for both of you or each?

You mention your income of >180k but not the partner's.
Assuming you make north of 250k between ya's, and your living expenses are 50k pa, how do you not have north of 200k in available cash?

Those are our family living expenses outside PPoR mortgage repayment. Total expenditure incl repayment is about 80k. We're a single income family, so my wife doesn't work. We keep some cash buffer for emergency, but most of our savings goes to the share portfolio and paying down PPoR debt.

 

[ramssss]

I read it as 30% of $400K loan is $120k + $50-70k cash = <$200k.

Sorry. perhaps I'm not using the right terminology. I meant to say the 400k loan is now only 30% of the value of the property.

A better strategy for you would be, subdivide and build houses (not granny flats). The depreciation of the building against your income would be a huge plus. A quality BA would be helpful in sourcing these properties.

To do small development upfront, I would have to redraw some equity from the PPoR. Not sure how risky it is given how time poor I am at the moment. Perhaps the strategy is a gradual shift towards subdivision as equity grow.

Depreciation is will definitely be useful at tax time. Perhaps buy/hold near new houses/units at the start of the journey?

 

[WattleIdo]

omg I understood everything you meant on the first reading. Nothing at all wrong with your terminology.

nhg has some good ideas. There is a thread where a guy is pretty much telling the forum that he does these plans .... for a price. On the thread is a suggestion for a book which sounds good -Property Puzzle or something. (Have a look under Accounting and Tax.)

Don't know why a BA has been suggested when all you've said is that you're low risk and analytical. That doesn't mean you can't do it yourself - just means you've got a lot of reading and research ahead of you.

Good luck. Standing by to see what input others have to add. I also need a 'strategy'. On the other hand ... really?

 

[starter]

I think the BA came from being time poor.

 

[ramssss]

Thanks for the tip, I'll lookup the thread you're referring to.

I quite like the research bit, crunching the numbers, testing scenarios. I can do that late at night after the kids are asleep. I would love to be able to do reno or small development work. But project managing builders and tradies during business hours will be difficult to juggle with my work.

So for capital gain focused strategy at the low/mid end of the market, what do you guys suggest? Newish inner city units to claim depreciation? Older houses further out with potential rezoning?

 

[mumbai]

Buy and hold newish but less maintenance properties like villas/townhouses if you are not very hands on and time poor. This will give you 'depreciation' for tax benefit + capaital growth (if you buy in right place at right time).

 

[Terry_w]

Work backwards.

You want $50k income in today's dollars. At 5% yeild you would need:

$50,000 / 5% = $1mil in paid off property.

Maybe we should use a lower yield to take into account expenses:

at 4% = $1,250,000

Now work out how many properties this is:
$250k properties = 6

So you need to aim to buy 6 properties worth $250k and pay them off in x years.

Is that feasible? For the average person it would be feasible to buy 6 properties in a few years. Paying them off maybe the hard part.

But you may end up buying 10 properties and then selling 4 to pay down the loans on the remaining 6.

Or you may buy 12 properties and let the rent increases over the next x years result in 12 properties which still have loans of $250k each, but are now worth $700k each and renting for $X pw generating the required passive income.

 

[woz]

Work backwards.

You want $50k income in today's dollars. At 5% yeild you would need:

$50,000 / 5% = $1mil in paid off property.

Maybe we should use a lower yield to take into account expenses:

at 4% = $1,250,000

Now work out how many properties this is:
$250k properties = 6

So you need to aim to buy 6 properties worth $250k and pay them off in x years.

If that feasible? For the average person it would be feasible to buy 6 properties in a few year. Paying them off maybe the hard part.

But you may end up buying 10 properties and then selling 4 to pay down the loans on the remaining 6.

Or you may buy 12 properties and let the rent increases over the next x years result in 12 properties which still have loans of $250k each, but are now worth $700k each and renting for $X pw generating the required passive income.

Great post terry. This should be in a sticky of FAQ

 

[ramssss]

Thanks everyone, very helpful. Anyone in a similar situation/constraint as mine? Keen to hear your stories.

Summary so far:
* Passive buy and hold
* Start with new-ish inner city townhouses/villa and claim depreciation
* Progress to small development if work situation changes

Any other alternative strategy to consider?

In my scenario, should I consider the right holding structures from the get go? Will the cost to setup and maintain a trust outweigh the benefit? All I'm looking for is tax arbitrage and efficient wealth transfer to my children.

 

[Terry_w]

In my scenario, should I consider the right holding structures from the get go? Will the cost to setup and maintain a trust outweigh the benefit? All I'm looking for is tax arbitrage and efficient wealth transfer to my children.

Dont assume structure = trust. There are many different ways to hold property in your own name:
sole
Joint
Joint tenants
Tenants in common

etc see my other thread on the different ways to own property.

 

[WattleIdo]

Thanks everyone, very helpful. Anyone in a similar situation/constraint as mine? Keen to hear your stories.

Summary so far:
* Passive buy and hold
* Start with new-ish inner city townhouses/villa and claim depreciation
* Progress to small development if work situation changes

Any other alternative strategy to consider?

This is a great idea and there are plenty of alternatives. For example, you can buy a rent-worthy not too run down house in an area where people don't expect anything too fancy and would rather be left alone than have renovations done all the time. Then do it up later when you have more flexibility.
If you buy something like this, you need to ask, read and keep your eyes peeled for areas that are popular but not expensive.

Buying inner city is sure to bring gains if you can afford it - be careful though - might be very hard to hold. You have a high income which would make it easier than it is for most.

There are all sorts of options. Apartments in the outskirts of the city - have become hot in Sydney. too soon for other cities? That'll be up to you to discover.

In my scenario, should I consider the right holding structures from the get go? Will the cost to setup and maintain a trust outweigh the benefit? All I'm looking for is tax arbitrage and efficient wealth transfer to my children.

Terry's post a few up from this is a gem!!

 

[MTR]

Thanks everyone, very helpful. Anyone in a similar situation/constraint as mine? Keen to hear your stories.

Summary so far:
* Passive buy and hold
* Start with new-ish inner city townhouses/villa and claim depreciation
* Progress to small development if work situation changes

Any other alternative strategy to consider?

In my scenario, should I consider the right holding structures from the get go? Will the cost to setup and maintain a trust outweigh the benefit? All I'm looking for is tax arbitrage and efficient wealth transfer to my children.

Hi rammsss
I am an investor/developer projects both in Perth and Melb, am based in Perth. You mentioned you were interested in purchasing in these two cities.

In your position I would consider purchasing development sites that are currently earmarked for rezoning with the view of developing within the next 2-5 years. You will achieve growth and an opportunity to develop down the track.

Many areas in Perth have and still experiencing considerable growth, they are close to the city, and also currently going through council etc. rezoning to higher density, lower price ranges from $420-480K, this will get you a 3 unit site, or alternatively keep the original house, and build at rear.

I personally would go down the road of developing and you mentioned this is a strategy you are perhaps interested in following. It will most certainly get you there a lot quicker, its investing on steroids.

I would start with simple, smaller projects, lower entry level. By land banking you will have options when zoning comes in, if you change your mind the fact that it is a development site is a bonus as it is unique and will sell for a premium.

Research under "adding value" there are a few developers around, many from Perth who have plenty of projects on the go. Also Westminster (Perth), Rockstar (Sydney), oc1 from Melbourne, check out his developments. I have just had plans and permits approved for 4 unit site in Melb which oc1 (Oscar) organised, as I am not based in Perth.

All the best

Cheers
MTR

 

[ramssss]

Dont assume structure = trust. There are many different ways to hold property in your own name:
sole
Joint
Joint tenants
Tenants in common

etc see my other thread on the different ways to own property.

Thanks Terry. I've assumed, perhaps incorrectly, that these structures you've listed will not allow discretionary routing of investment income for tax arbitrage?

Buying inner city is sure to bring gains if you can afford it - be careful though - might be very hard to hold. You have a high income which would make it easier than it is for most.

There are all sorts of options. Apartments in the outskirts of the city - have become hot in Sydney. too soon for other cities? That'll be up to you to discover.
Terry's post a few up from this is a gem!!

That's certainly is food for thought. I like having the option to move into development at some stage in the journey. Inner city investment feels a lot safer to me. My worry is getting tapped out early in the acquisition phase. What's your investment strategy?

Hi rammsss
I am an investor/developer projects both in Perth and Melb, am based in Perth. You mentioned you were interested in purchasing in these two cities.

In your position I would consider purchasing development sites that are currently earmarked for rezoning with the view of developing within the next 2-5 years. You will achieve growth and an opportunity to develop down the track.

Thanks MTR, I've been reading a lot of your post on these future dev sites. Having grown up in Perth, the strategy seems comparable with investing in Balga in the late 90 and early 00s? Where do you think Perth is in the cycle? Assuming you're still working fulltime, how do you manage your time between work and managing your projects?

 

[Terry_w]

Thanks Terry. I've assumed, perhaps incorrectly, that these structures you've listed will not allow discretionary routing of investment income for tax arbitrage?

Only a discretionary trust would allow income to be routed differently each year.

 

[alexlee]

You're relatively young, have a load of equity in your PPOR, and no investments. You're most likely going to be borrowing 100% for investments. i.e. you're unlikely to have any positive taxable income to distribute anyway. Losses in a family trust cannot be distributed.

At the same time, having assets in your own name will be beneficial because you can offset losses against your personal (high) income.

You're more than likely to buy multiple assets over time anyway, so you really have to ask yourself whether it makes sense to start with structures for the purpose of streaming income, when there might not be any income to stream for a long time, versus being able to offset losses against your own income in the short to medium term.