First post! Please advise :)

Hi everyone, great forum, have been lurking around for about 12 months now learning as much as I can from other investors and thought its abut time I signed up and asked for some input and advice. In hindsight I should have done this long ago but as they say the best time to plant a tree was 10 years ago but the 2nd best time is today.

Basically I would like to acquire a 10 property portfolio in a 2-3 year time frame and my goal is to be able to sell 5 to pay down debt and receive a passive income from the remaining 5 properties say 10-15 years down the road depending on CGs and circumstances. Currently my wife and I have purchased a PPOR and 2 investment properties all in northern suburbs of Melbourne. PPOR was purchased 3.5 years ago (H&L package), 1st IP purchased in March this year and we just purchased our 2nd IP awaiting settlement. Both IPs are new with gross yields around 5%. PPOR and IP no. 1 are crossed at 78.5% combined LVR (borrowed 104% for IP 1 using PPOR equity), while IP no. 2 is a standalone 90% LVR, but all 3 loans are with the one bank, offset account attached to PPOR paying P&I, interest only for IPs. Our combined income is approx. $140k and we are in our early 30s with one dependent.

We would most likely look at a different financial institution for IP 3 and borrow 90% again, and we are not comfortable looking interstate. Would prefer to look to the east, west, south, or regional areas first. A few areas in my research are Ringwood, Frankston, Wodonga, Ballarat, Bendigo, Warnambool.

In people's opinion where should we go from here in terms of where to look for our next properties and our finance structure (I used a broker). I am not looking for development sites, prefer newer properties with less maintenance and yield is important due to our income. Is my goal realistic or should I give myself more time to accumulate? My wife is pretty nervous about it all and i cannot guarantee she will stay in full time work and we might have another child so serviceability is my main concern.
 
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Can the broker uncross the loansfor you now?

Hi Aaron_C I did express my concerns to the broker after I researched more into x-coll but he doesn't think there is anything wrong with it. I am frustrated the broker wasn't transparent about the negatives. And I was a little misguided by Margaret Lomas's take on its advantages, but I now do believe its best to avoid. I have not pushed the issue to have him uncross it yet because IP 1 is on a fixed rate for another year or so and therefore not sure if its worth paying any penalties. It sure has been a learning experience for me so far.
 
Hi Dbz_Vic

I really like your enthusiasm, but I think there's a few reality checks here which might get in the way of having 10 properties in 2-3 years.

There's two primary parameters to borrowing money. The first is serviceability and the second is putting your own money or equity into the deal.

Realistically speaking a property returning a 5% yield is not positive cashflow. 5% barely covers the interest repayments and you should be budgeting that rates will increase. Add on holding costs (maintenance, rates, management, etc) and you've got negative cashflow.

This isn't necessarily bad, but if you're worried that serviceability is an issue in the near future, it's probably not going to get any better as you purchase more properties. This may not stop your plans, but it will likely slow you down a bit.

The second problem is you need to put something into the deal yourself. Your current portfolio is currently geared to almost 80%, you can increase this to 90% of its value and release the extra 10% of equity you've got. You haven't indicated what your portfolio might be worth, but if I assume it's worth $1.5M, then this will allow you to access about $150,000.

Assuming 10% deposits and 5% purchasing costs, this would allow you got leverage into an additional $1M of property. I don't realistically think you can rely on 95% loans, these get very after about $800k in borrowings.

This begs the question, will $2.5M in property (including your own home) be enough to achieve your goals? Keep in mind that prices in the areas you've mentioned start at about $200k and go up to about $500k.

I'm not saying you can't achieve your goals, but you're going to need to heavily rethink your strategy, price points and locations if you want 10 properties in 2-3 years.

The immediate thing you should do is uncross your existing loans. Whilst this may not be creating a problem now, it definitely will derail your strategy at some future point. I suspect that point is not far away.

Also, fire your existing broker. Any broker or banker who does cross-collateralise like this does not really understand strategic lending for property investment.

I'd say that 10 properties is probably possible within 5+ years, but you're probably going to have to look interstate at properties with lower price points and better rental yields. You're probably both going to have to keep working during your accumulation phase as well.
 
Thanks PT_Bear and Aaron_C for both your advice, really appreciated. I have been unhappy with my current broker for a little while now so my business is going elsewhere. Will definitely be looking into uncrossing sooner than later. And PT_Bear my portfolio's combined value is around $1.35mil and 80% lvr. Will definitely still be aiming to acquire as many as I can within the next few years, but like you pointed out will be a real stretch to get to 10 properties or more specifically the portfolio value I want in under 3 years. To be a little more specific I would like a minimum $5mil portfolio fully paid out in 20 years time when I am in my early 50s. I will have to crunch some more numbers and recalibrate my short term expectations for now. Definitely going to keep working for as long as we can, or need to ;)
 
I don't think that ten properties in three years is impossible. The strategy might need refining just a little but if that is your goal then by all means find a way and go for it.

That said, if that short-term goal is just part of the bigger picture of having five properties paid off in twenty years then I would suggest that there might be easier ways to go about it. Many ways to skin the proverbial.
 
I don't think that ten properties in three years is impossible. The strategy might need refining just a little but if that is your goal then by all means find a way and go for it.

That said, if that short-term goal is just part of the bigger picture of having five properties paid off in twenty years then I would suggest that there might be easier ways to go about it. Many ways to skin the proverbial.

Yeah agreed, I have a couple of clients that have bought 10 properties in 1 year... It depends on your starting position but it's all down to where you want to finish not start.
 
Hi Dbz,
I have to agree PT Bear. Your current strategy of buying new with a 5% gross yield will be negatively geared and you will be losing money each week no doubt. I'm in my mid 40's and have roughly a combined income with my wife of $150,000. All our loans are cross collatarised with the one bank. This hasn't caused that much grief for me mainly because with my borrowings I do have some leverage with the bank to negotiate better interest rates. For example I was able to negotiate 4.99% for 3 years at a time was considered a great rate. We also now deal with the branch manager for all our dealings now not a loans officer. I do recognise the benefits of them sitting separately however. With regards to capital growth although sometimes you can see it from similar properties around yours the bank values may not see it. Therefore the equity you think you have may not materialise with the bank valuation after a year or so. The good thing with new properties that you are purchasing is depreciation benefits make sure you get a depreciation schedule done for each of them. As for your approach to get those 10 properties with your current strategy will be a big struggle. You've got to factor in interest rate rises as the interest rates won't stay low forever. Your're serviceability will hit the wall soon, so either you've got to make more money, live more frugally, or raise rents. None of these options never appealed to me. When I hit the serviceability wall it may me think of how to do things differently to continue on my purchasing journey. First effort was to look interstate for low costing positively geared properties. I sold a property in Bendigo freed up money and went to Rockhampton and bought a couple of properties over 10 years ago which was a good move. Soon after went to Cairns and bought 2 more properties another good move. Sold these properties after a few years and made good money from them. Decided to keep on the positive cash flow strategy and went overseas long story short lost a lot of money in the USA. Ok back to investing in Australia lesson learnt. Started buying properties in Bendigo again low price, good areas fixing them up and renting them out. When buying a property I ask myself why? Will fixing it up and renting it out provide a neutral or positively geared property if so it's a keeper, if not will I be able to sell it a year later and make a profit on it after renovations and holding costs are taken out including tax implications then I call that one a flipper, is it a property I can subdivide and still make a profit on it after subdivision and Reno costs are added in? All I'm saying is that you may need to look at different strategies to reach your goals. Some will work some won't ie the USA option. If it looks to good to be true it often is. Good luck.:)
 
Perhaps go for quality of property rather than quantity?? Isn't that the elephant in the room? One $2m property vs 10 x $200k...
 
First of all thanks everyone for your advice, very much appreciated :)

JamesGG, you are right, our short term goal of 10 properties is the vehicle to achieving our end goal of having a $5mil portfolio fully paid out, with the properties earning us a passive income of $255,000 pa. I got to the figures using a compound calculator and assuming 3% inflation pa we will need $255k pa to achieve the same income we have right now in 20 years time.

Using the same calculator and assumptions, we need to accumulate a $4mil portfolio by assuming values compound at 5% pa, we will have $10.8mil in 20 years which we can then choose to sell off half the portfolio leaving us a $5mil portfolio. If values grow at 6-7% even better but if it only grows at rate of inflation of 3% then we'll need to accumulate a $5mil portfolio but if that happens its probably better to invest in something else. And if gross rental yields stay at 5% that comes to $250k pa income not including expenses. And of course I have not taken into consideration cgt and all the other expenses but I think this is roughly what we should be aiming for - a $4mil portfolio in as short a timeframe as possible. Might just have to delay retirement till we are in the 60s!

Brisbane_04, thanks for sharing your journey so far, its always great to hear about people's successes and failures along the way. Our risk profile is pretty low risk hence the newer properties we have purchased and closer proximity to where we live. I believe maintenance costs on older properties will just be a cashflow drain although the possibility of better yields. However newer properties are more marketable imo and the good depreciation is a bonus. I understand it all comes down to numbers in the end, and not all properties are the same, lots of factors to look at to determine which is better. I am also not very handy and don't have much spare time so renos are definitely off for us, and subdividing presents even more challenges so no go. But i understand these are other options.

We are also with the one bank (ANZ) for all my loans and have received a 1% package discount but honestly i don't think our rates are that great at 4.88% var., not bad but not great. 1 property was fixed at 5.29% earlier this year with another year or so to run. For future loans we will need to reassess.

FMS, i have not checked what the break costs are but will look into it.

Aaron_C, that's a good point. I am actually a fan of the concept, less properties to manage has its advantages but thing is rental yield will most likely be even lower with high end properties, potentially ending my investment journey short, but CGs might just make up for it in the long term. Its something worth looking at for sure.
 
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Aaron_C, that's a good point. I am actually a fan of the concept, less properties to manage has its advantages but thing is rental yield will most likely be even lower with high end properties, potentially ending my investment journey short, but CGs might just make up for it in the long term. Its something worth looking at for sure.

Depends on the property. Higher end stuff doesn't necessarily have to be negatively geared but more likely to be.
 
Perhaps don't think about how many properties you want to buy, but figure out what the actual financial goal is. For example, you want $100,000 in passive income from rent.

If you're investing in property with a 5% rental yield, you can assume that 20% of that rental income goes straight into holding costs over and above the bank loan, thus you really get a net yield of 4%.

To deliver $100k income with 4% yield you need $2,500,000 invested.

Now it becomes a question of how do you get $2.5M in property without a loan and delivering 5% rental yield. This will point you down the path of how many properties, what they're worth, then the strategy and time frame to get you there.

This could end up being 1 property worth $2.5M (unlikely and risky due to a lack of diversification), or 10 properties worth $250k each.

It might be a strategy of acquiring $5M of property, holding until they double in value and then selling of enough to pay off debt to get the cash flow outcome, or it might be investing in 10% yields and still getting the money you want after paying the interest bill.
 
Hi Dbz_Vic

You have done your calculations and know where exactly you want to be in 20 years time. Great!

If you have a 4M portfolio now with 3.6 M loans, by the time your asset base has grown to 10M and if you sell half your portfolio, CGT will be covered as well. I reckon you won't have to wait 20 years to build a 5M equity.

Now you have to find ways to buy the initial 4M portfolio. You have 1.35M with 80% LVR. To buy another 2.65M, you will need 400k to cover deposits and costs (15%). As you can access 135K from your current portfolio, you need further 265K.

You can do in a number of ways
1. Both work full time for another 2-3 years, live frugally and save.
2. Educate yourself to pick rising markets and buy well so that the houses you buy go up in value in say 2 years and get you enough equity to buy further.
3. Buy run down houses and renovate them. Cosmetic renovations are not that hard as they seem. You don't have to try anything fancy. A new kitchen, new carpets, new window treatments, new light fittings and painting are all what needed to change a run down property into new one.
4. Buy houses with enough land to subdivide and build! You will have new houses and create equity as well.

So go, find your 265K and achieve your dreams. Best wishes :eek:
 
It might be a strategy of acquiring $5M of property, holding until they double in value and then selling of enough to pay off debt to get the cash flow outcome, or it might be investing in 10% yields and still getting the money you want after paying the interest bill.

Peter, very interesting point you raised. Investing in 10% yields sounds great :D but i think only way its achievable is through dual occ. or sub dividing? Is it fair to say investing for yield is a safer bet than investing for CGs since yields are almost certainly a more secure return (tangible, cash right now and scope to increase rarely decrease) while CGs are not guaranteed. :confused:

Hi Dbz_Vic

You have done your calculations and know where exactly you want to be in 20 years time. Great!

Only did the calculations yesterday :p but honestly that is the minimum position i want to be in as i cannot see things being anymore affordable and to live comfortably without relying on our super or pensions. But how long is a piece of string right, if i can achieve more i will surely try.
 
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