How can you afford to keep buying properties?

[Many houses]

Hi everyone,
I would like to own multiple investment properties. I may be wrong, but it seems that with most investment property purchases there is a shortfall between the rent received and the mortgage repayments due, which the IP owner has to pay.

So how can people who are not on large incomes afford to keep buying more and more properties and keep increasing their mortgage repayments with each purchase?

I would like to hear all your ideas of ways around this. Thanks.
Jill

 

[alexlee]

Hi everyone,
I would like to own multiple investment properties. I may be wrong, but it seems that with most investment property purchases there is a shortfall between the rent received and the mortgage repayments due, which the IP owner has to pay.

So how can people who are not on large incomes afford to keep buying more and more properties and keep increasing their mortgage repayments with each purchase?

Some ideas about this:
1) Rents go up over time, increasing your serviceability

2) You learn to buy better over time and so get better yields, especially if you do renos, development, etc

3) You can use deposit bonds, etc to ‘convert’ equity into bank-recognised servicing power as time goes on

4) Buy higher yielding properties: commercial, regional, etc

5) Borrow against your IP at, say 7% and invest in LPTs, property syndicates, high yielding shares at >7%, increasing your serviceability

I wouldn’t think too much about it right now, though. Realistically, people buy over a number of years. My first property rented for $210pw, and now it rents for $285pw. That’s an extra $3,500 or so of ‘extra’ serviceability over 6 years. When you hit a serviceability wall THEN worry about it.

It IS possible to be on low income and buy lots of properties. No point worrying about ‘how do I service 10 properties’ if you’re still thinking about buying your first one. You mentioned that you want to own multiple IPs: which is great, but remember multiple IPs is made up of individual IPs that you have to buy individually.

One step at a time. Concentrate on how to find good areas to buy instead. Once you have a chunk of equity and properties that are growing, serviceability isn't a big issue. Building up a portfolio that will generate increasing equity is the challenge.

It's like an ordinary person watching an olympic athelete perform: the athelete can tell you how they train, but it won't mean anything until you get out there and start training yourself. In other words, people who hit serviceability walls don't worry about them because you'll naturally have ways to get past it when you get to that stage.
Alex

 

[Tim]

Also:

1) Incomes go up so servicing gets easier

2) If the are P&I they can be periodically refinanced with lower payments (depending on interest rates)

3) Money can be draw on equity as a LOC and used to pay the negative geared component over time

4) Over time using capital gain, properties can be sold to service the holding of other properties

Tim

 

[redwing]

Some ideas about this:
1) Rents go up over time, increasing your serviceability

2) You learn to buy better over time and so get better yields, especially if you do renos, development, etc

3) You can use deposit bonds, etc to ‘convert’ equity into bank-recognised servicing power as time goes on

4) Buy higher yielding properties: commercial, regional, etc

5) Borrow against your IP at, say 7% and invest in LPTs, property syndicates, high yielding shares at >7%, increasing your serviceability

I wouldn’t think too much about it right now, though. Realistically, people buy over a number of years. My first property rented for $210pw, and now it rents for $285pw. That’s an extra $3,500 or so of ‘extra’ serviceability over 6 years. When you hit a serviceability wall THEN worry about it.

It IS possible to be on low income and buy lots of properties. No point worrying about ‘how do I service 10 properties’ if you’re still thinking about buying your first one. You mentioned that you want to own multiple IPs: which is great, but remember multiple IPs is made up of individual IPs that you have to buy individually.

One step at a time. Concentrate on how to find good areas to buy instead. Once you have a chunk of equity and properties that are growing, serviceability isn't a big issue.
Alex

I'm with Alex,

I've found time and growth to be my ally, we are not on a huge income and our interest on the loans is nearly the same as the annual JOB wage (luckily rents assist and are growing).....I'd like to move forward a bit faster and some of the great tips from the forum have assisted me in this of late.

 

[sailor]

What is a deposit bond please?

 

[Simone]

Hi Jill

You are right in that there is usually a shortfall between the rent recieved and repayments. I agree with Alex - over time the bigger picture will fall into place and make more sense - once you have built up equity this can be used as a deposit / security on the next house. I would suggest not over extending yourself on your first IP (assuming you have not purchased yet?)
I personally, if starting out again now and didn't have a big income would be looking for a property in the low 100's, - everyone has there own style when investing, my husband and I are still yet to spend over the 170 mark for a IP - this has worked well for us but others may see this as limiting?? Other tips are:
* look for up and coming areas and then research - so you are a full bottle on price and have a understanding of vacancy rates - rent return and infrustucture.
* Once we have found an area we narrow it down again to pockets we would purchase in (our latest purchase in salisbury was walking distance to the city, train, school)
* We make fortnightly repayments and slightly more than required, eventually you will have money that can be redrawn. We never touch this, we leave it sitting on the house as a back up.
* We use the tax return to pay for all the rates / land taxes

There is an intersting article in August property investor magazine www.agimagazine.com.au (don't know if you can view via the web??)"Five eggs, one basket" about a couple who purchased in Port Pirie last year.

 

[alexlee]

Sorry, my error. It's a cash bond (deposit bonds are used for OTP purchases).

My understanding is this: you buy a 5 year cash bond for $100k. Every year the bond pays you $20k + interest. To the bank, the whole payment is counted as serviceability and so your serviceability just went up by $20k a year.
Alex

 

[Tools]

A deposit bond is a guarantee issued by a bank or other issuer that is used to pay the deposit for property,instead of using cash.A premium is paid of course,but it saves your cash until time of settlement.They are not just used for off the plan purchases,and you can even use them at auctions (but I would check with the REA that they will accept them first before bidding !)

Tools

 

[sailor]

Sorry, my error. It's a cash bond (deposit bonds are used for OTP purchases).

My understanding is this: you buy a 5 year cash bond for $100k. Every year the bond pays you $20k + interest. To the bank, the whole payment is counted as serviceability and so your serviceability just went up by $20k a year.
Alex

Thanks Alexlee, I'm off to Google them now and find out some more.
Never a day goes by, that I don't learn something new from SS.

 

[redwing]

have a look at some of Rixters posts on the subject of Cash Bonds Sailor

 

[rj]

Search, this topic has been covered to death.

RJ

 

[Rixter]

Thanks Alexlee, I'm off to Google them now and find out some more.
Never a day goes by, that I don't learn something new from SS.

Sailor,

This is how I have used a Cashbond/Annuity to keep purchasing IPs. I use it in conjuction with my CGA Strategy -

When you have a few IPs under your belt Serviceabilty will eventually become an issue. The banks/lenders will not lend you money due to you not meeting their standard lending criteria. As you know banks/lenders work out seviceability under 2 modules - LVR & DSR.

Where the majority of investors start to reach their borrowing capacities is in relation to the DSR or Debt Service Ratio. In other words not enough cashflow income to service your IP debt. Now this isnt really a problem if you can increase your income. But how can you do that

Obviously there are many ways as the mind can conjure up. But the main ways most investors know of is to increase you PAYG income and/or increase your IP rental income. As these methods are fairly well reliant and restricted to market conditions alot of investors dont know where to go to from there. Alot forget about the store of Equity they have with their low LVR's created over time by past capital growth.

Thats where a Cashbond or Annuity comes into play - which is method I have implimented to get me around the lack of serviceability issues and allowed me to keep borrowing to build my Portfolio.

A cashbond basically works by converting existing equity into cashflow for the purposes for increasing your income in the eyes of the banks/lenders.

The way it works is as follows - you purchase a Cashbond/Annuity or guarranteed income plan from an insurance company. That Insurance company then pays that back to you plus interest over a nominated term - usually 5 years. You purchase the Cashbond using funds with drawn from a LOC.

For example if you purchased a $100,000.00 cashbond over a term of 5 years, each year you would get $20,000 plus interest paid back to you. Now when you go to the bank for a loan to purchase your next property you can show 100% of that $20,000 income on the INCOMES side of your loan application on top of your existing Payg Income & all your other rental incomes...In other words You have effectively increased your borrowing because you have an extra $20,000 income in the eyes of the banks. Pretty neat hay

You can also use that cashbond income to service your portfolio holding costs as well.....this giving you sleep at night factor knowing you can service the debt comfortably.

This how I have been able to keep purchasing. Now I know this method is not for everyone. It all depends on your circumstances, goals, time frames & your individual investor risk profile.

Hope this has provided you & everyone else with some food for thought.

 

[Jindaro]

3) Money can be draw on equity as a LOC and used to pay the negative geared component over time

We use this idea plus also purchase properties that require reno or development or subdivision which then allows us to revalue, then pull down more LOC and use this as the next deposit plus also pay the shortfall.

I know a lot of people don't like using LOC for supporting their properties, but each to their own. Suppose it comes down to the SANF.

 

[alexlee]

I'm with Alex,

I've found time and growth to be my ally, we are not on a huge income and our interest on the loans is nearly the same as the annual JOB wage (luckily rents assist and are growing).....I'd like to move forward a bit faster and some of the great tips from the forum have assisted me in this of late.

I didn't realise so many of my points are actually about time, but that makes perfect sense. Property investment is safest (and arguably the most profitable) when you give it time. In the first couple of years (assuming normal growth) very little happens. If you buy and manage diligently, your portfolio will hit critical mass (usually in the form of it growing enough every year for you to buy more investments purely from the growth).
Alex

 

[gecko]

Hi Jill

I personally, if starting out again now and didn't have a big income would be looking for a property in the low 100's, - everyone has there own style when investing, my husband and I are still yet to spend over the 170 mark for a IP - this has worked well for us but others may see this as limiting??

Simone (and others),
As a newbie and not yet out of the research and preparation stage, I am curious. Does your comment mean that most of your properties are units or apartment style IPs. If so, doesn't that limit your opportunity for CG?
For myself, I can't afford to have too much gap between the inflow and outflow, else the investment process would come to a pretty quick stop. But IP's close to positive CF seem to be rather elusive, inspite of what the highflying promoters seem to suggest.
I would love some feedback and help with this point. It is the one thing that is making it hard to make the first step.
Thanks.
Gecko

 

[alexlee]

Simone (and others),
As a newbie and not yet out of the research and preparation stage, I am curious. Does your comment mean that most of your properties are units or apartment style IPs. If so, doesn't that limit your opportunity for CG?
For myself, I can't afford to have too much gap between the inflow and outflow, else the investment process would come to a pretty quick stop. But IP's close to positive CF seem to be rather elusive, inspite of what the highflying promoters seem to suggest.
I would love some feedback and help with this point. It is the one thing that is making it hard to make the first step.
Thanks.
Gecko

Every market is different, Gecko. IPs in the 100s doesn't mean it's necessarily a unit. I bought a Perth house for $165k in 2004. You can't get that now, but you can find cheap properties in some suburbs. Nor does it necessarily limit your opportunity for CG: my own thinking is that units / townhouses will go up at the long term rate of 7-10%. Houses have additional gains from change of use (redevelopment). The good thing about property is that because of the leverage, even 5% annual capital gains can mean significant $ growth.

You can mix and match: start with units, then use the increased equity to buy houses (which is something I'm doing). Though you'll find, for example, that a nice unit in a suburb might be almost the same price as an older house in the same suburb!

Realistically, if you buy even one property a year that's pretty fast. Buy one property, get used to the negative cashflow, and when you're able to (when rent goes up, say) buy your 2nd. Even if you only buy 10 properties over 20 years, you're still going to retire rich.
Alex

 

[sailor]

Thanks Rixter...I've got it now.

 

[Simone]

Hi Gecko,
Our lastest property, purchased a couple of months ago was a house on a good size block - and to back up what Alex just said, units / villas in the area were selling for around the same price - I might add that our house was not even in need of any reno (already had new kitchen, paint). I think it is just about researching. My husband and I new we found the one before even seeing inside. Our other IP we own/ed: 3 houses (1 now sold - bummer, sold too early!) 2 units, 1 duplex pair on 4 unit site (owned with sister and brother in law!) and extemely cheap block of land that has done very well. Our rule with units is that they are in small complex - both our units are 1 of 4. The last one we purchased (over choosing a house) was because it sits on a 8 unit site 150 metres to the beach - so units for us have to have to have something great going for them. 4 of these properties have all been purchase within the last 6 years. We went interstate for the last one to keep with our style of investing in the 100's. We never thought we could of managed more than 2 IP's but over time (as others have said) rent's go up - equity builds and you find yourself in a position to purchase another one.

Hope this helps

 

[Bandita]

Sailor,

This is how I have used a Cashbond/Annuity to keep purchasing IPs. I use it in conjuction with my CGA Strategy -.

The way it works is as follows - you purchase a Cashbond/Annuity or guarranteed income plan from an insurance company. That Insurance company then pays that back to you plus interest over a nominated term - usually 5 years. You purchase the Cashbond using funds with drawn from a LOC.

Hi Rixter,

Thanks so much for the info on Annuity/Cashbonds! Was wondering what the general interest rate is that the insurance company pays to you? Also, what is considered taxable income on the repayments - just the interest, or the whole repayment?

Cheers,
Jen

 

[The Y-man]

So how can people who are not on large incomes afford to keep buying more and more properties and keep increasing their mortgage repayments with each purchase?

I would like to hear all your ideas of ways around this. Thanks.
Jill

As well as the other great ideas above, other possibilities are:

1. Diversify into dividend yielding shares - which will improve cashflow and be tac effective
2. Diversify into commercial propoerty through listed or unlisted property trusts.

Neither of these require huge capital (i.e. about $500 ~$5,000) to start up, and will generate extra income .

I was about to say - search the forum for "serviceability" - but the search came up with no returns?

Cheers,

The Y-man