From IP1 to IP2

[magic]

I'm in the process of buying/planning for IP1. But I want to consider how I'm going to get IP2 because it may affect my strategy for IP1.

I would like to know how long it would take before I could realistically buy IP2. e.g. would it be possible after 12 months.

If I buy IP1 for $500,000 (Rent $430 per week) which would be a property in original condition and renovate it, lets say after a $20k renovation it is worth $550,000 (Rent $475 per week). The original loan amount is $400,000.

When buying IP1 I'm being as aggressive as possible, so $500,000 is the max I could buy with my cash deposit + bank loan (as much as the bank will lend me). I know that 80% LVR is not that aggressive, but say the bank would lend me up to $400,000 based on my current income, and I use $100,000+stamp duty+costs from my cash savings for the other 20%. In other words the bank won't lend me $450k on a 90% LVR.

After 12 months, say the property increases by 5% in capital growth. i.e. the value increased from $550,000 to $577,500. I also get a small pay rise of $2000 p.a. from work and adding the $2340 p.a. extra rent after the renovation gives me an extra income of $4340 p.a. after 12 months.

So after 12 months I could probably get a LOC of I'm guessing around $30k. I'm going to get this LOC and keep the funds there as a second buffer (in addition to my cash buffer) so that I can still afford to fund the negative cash flow shortfall if something goes wrong.

I know there is rent which helps serviceabilty when there is IP2, but it seems that after 12 months I can only access a $30k LOC and it is still a fair way off before I can buy IP2 for say $250,000.

So I estimate that I won't be able to get IP2 until around 4 years after IP1 after rents go up which will reduce the negative cash flow shortfall. Am I on the right track in this line of thought? Or how long do you think it will take? If it would take 4 years before I can buy IP2, then my strategy would be to be aggressive with IP1 and buy the highest value property that I could reasonably get a loan for.

I don't understand how people are able to buy one property per year with a captial gain focus which would generally be cash flow negative in the first several years, especially if you maxed out your loans on each one.

 

[Peter_Tersteeg]

I don't understand how people are able to buy one property per year with a captial gain focus which would generally be cash flow negative in the first several years, especially if you maxed out your loans on each one.

The highlighted text essentially is the problem. People buying multiple properties don't max themselves out, especially on their first property. If you can afford $400k but not $450k, then chances are you're not going to be buying another property soon. The increase in equity you might experience is nice, but it doesn't increase your ability to afford a loan. Certainly the rent from a subsequent property would help, but it's rarely enough to get it over the line.

A cash-flow positive property usually isn't going to increase your serviceability enough. You'll likely need a rental yield of 10% or more to have a property increase your affordability under the banks criteria. These types of property aren't exactly common, and may that are available come with significant risk.

In this scenario you need to look to a strategy to increase your cash-flow. Renovating / subdividing / developing might increase rental income. Often people simply have to wait it out.

 

[Mick C]

Make sure you choose the right bank for loan 1 if your planning on "taking out equity" =- not all banks support equity release and if they do it may be at a certain LVR.

You see ppl buy 5 property in a short period of time; it's because most would have built up a good equity amount over the last few years already.

 

[Michael_X]

I don't understand how people are able to buy one property per year with a captial gain focus which would generally be cash flow negative in the first several years, especially if you maxed out your loans on each one.

You can definitely acquire faster. My recommendation is speak to a good mortgage broker from the forum and determine what your max really is - you will be surprised.

I was in a similar boat last year, banks said I could only borrow a small amount, then spoke to a broker from Somersoft and 12 months later we have gone from IP2 to IP9.

 

[r3ckless]

You can definitely acquire faster. My recommendation is speak to a good mortgage broker from the forum and determine what your max really is - you will be surprised.

I was in a similar boat last year, banks said I could only borrow a small amount, then spoke to a broker from Somersoft and 12 months later we have gone from IP2 to IP9.

Thats inspirTional - that last libe!!!

Im in some similiar. I want to keep the lvr to 90% plus lmi so comfortable at putting down 10%+sd.. trying to buy as much as possiblr

 

[magic]

Hi MXia,

Very impressive!

Which broker did you use?

What is your strategy, I'm guessing it might be lower priced properties with high rental yield?

 

[Michael_X]

Let me PM you the broker details.

The strategy has varied over the past year.

IP3-5 - were all renovations. Purchased around the $200k mark. Cosmetic reno and the vals have come back around $300k. All cashflow positive.
IP6-9 - buy and hold. Used the equity from above and funded these interstate purchases. A few have involved minor renovations but nothing like the first bunch.

At this stage coming close to the end of my serviceability so starting to focus on land content with the hope of development one day.

 

[imbi3]

Let me PM you the broker details.

The strategy has varied over the past year.

IP3-5 - were all renovations. Purchased around the $200k mark. Cosmetic reno and the vals have come back around $300k. All cashflow positive.
IP6-9 - buy and hold. Used the equity from above and funded these interstate purchases. A few have involved minor renovations but nothing like the first bunch.

At this stage coming close to the end of my serviceability so starting to focus on land content with the hope of development one day.

Hi MXia. Did the broker help you with the strategy ie buy, reno, hold etc or did you know what type of property you wanted from the beginning?

 

[Michael_X]

The first property when I started was through a buyer's agent. The deal itself wasn't great, but at least it showed me what could be done.

I went to my broker and he came up with the best lending structure for my strategy. The key was planning the equity pull after the reno so decided to go with 80% lend. 6 month later, we had the property revalued from $155k to $235k (spent around $35k reno).

Whilst doing that I realised it worked and replicated this on two other properties. The 80% lend was important as we switched banks on two loans based on higher vals.

After that, when I moved to Brisbane my strategy changed to buy/hold, we went with 88% lend so I could buy a few more and ride the market. Also at that stage, Sydney and surrounds were too hot for my liking and I didn't want to manage interstate renovations.

So I guess comes down to your strength, the market and your financial position on what best strategy to take.

 

[magic]

Continuing on from my example above, it appears that it would take ages before I could get IP2 for $250,000. From what I can see, I need:

If rent increased 5% p.a. from $475 to $735pw in 10 years, i.e. an extra $260pw
Rent on IP2 could be $250 per week
($260+$250) x 52 x 5 gives a loan of around $132,600

PLUS

Cash savings $117,400, which would take 10 years, i.e. $11,740 per year.


Employment income is probably the same over the next few years.

In 10 years time, price rises means that IP1 has increased in value allowing a equity release, but since my income (employment and rental) didn't increase much, it is useless because the bank will say I won't have the serviceability for an equity release.

In 10 years time, the $250,000 property that I haven't been able to buy yet would have roughly doubled in value to $500,000 putting it out of reach.

Hmm, how would I get to IP2?

 

[lup15]

Firstly, I'm in the same boat you as you magic, in that I'm planning to buy my first property but also planning ahead for the next one and so on. So my first hand experience is quite limited.

The main issue I see with your plan, is that it is relying on capital growth and rent increases. However as we've seen over the past few years, you can't always say that either rent and/or capital growth will increase each year.

My plan is to force equity by doing renos on first IP. This will fund the 2nd IP + small cash injection. After a few of these, probably start looking at subdivision and small development (like 1 house on the subdivided lot).

Basically, I think by being proactive in generating equity, it will help things rolling and also build that cash buffer. Any capital growth and rent increase will be an extra to that buffer but don't solely rely on that.

Open to comments and criticism

 

[superAndrew]

It's hard to buy your first investment property and can seem like it's impossible to keep buying after that.

I would recommend that all first time buyers start small and don't max themselves out with their first property.

I wouldn't be approaching property investment as a race.That's usually the recipe for failure and will slow you down in purchasing more properties.

Buy one property first at a price you are comfortable meeting loan payments. Set up this property with a tenant and/or renovate. The goal here is to set up this property in such a way that it won't cost you to hold. You will learn a lot from your first purchase.

Then move on to the next one.

It's important to not get lost in the numbers. 5 x $200,000 properties or 2 x $500,000 properties? More doesn't necessarily mean better.

Cheers

Andrew

 

[magic]

The only way I can think of to buy more if I max out on the first one is by increasing income which would give more serviceability.

If yield is 5% at purchase, a reno could increase the rent by say 10% i.e. 5.5% yield. If I buy a house with a sufficiently large backyard and build a granny flat, with the rent from the house + granny flat I could achieve a yield of around 7%

So that's nowhere near the 10% yield needed to improve serviceability.

If that is the case, I still think it is better to max out the loan on the first one since it is unlikely that I would be able to purchase IP2 for many years. I rather have one high value property than two smaller value properties, because I expect the CG will be higher on the higher value one because I can buy in an area with higher demand.

 

[antistar]

From my experience patience is the key to investing. There is no point following a '10 properties in 10 years' or similar programs if you are serious about investing and building assets. You are definitely doing the right thing by thinking and planning around it from now - the rest will come when enough time has passed. You will be surprised how much of a factor the value of time itself can be when investing. No need to rush.

If your job / life / schedule allows you then renovations and adding value to IP1 in a similar manner can will help boost things up.

Kind of in line with what superAndrew said about 5 properties of $200k each vs 2 x properties of $500k each. Kudos and a really good way to think about things.