How do you grow your portfolio beyond 3 IPs???

[Mindmaster]

I currently have 2 IP's and plan on buying a 3rd Ip after June. Obtaining finance for the first two IP's was not difficult. Optaining finance for the 3rd IP is likely to be a little difficult but no major problem. Obtaining finance later for a 4th IP will probably not be possible.

My initial investment strategy has been to increase my portfolio to at least 6 IP's over the next 5 to 10 years. Ideally the portfolio would be cashflow nuetral or slightly positve at the end of 10 years. At the moment though I don't see how I can do that.

This is my situation
IP 1 - Valued 365k by residex Nov 2010, weekly rent is $250, owe 160k
IP 2 - Valued 303k by residex Nov 2010, weekly rent is $280, owe 153K

I plan to reduce debt by 14k by the end of June to give a total loan value of around 300k.

-Expected annual net income at the end of June is 62k.
-No debt other than loans for IPs.
-I work overseas so negative gearing and tax issues don't really effect me.
-I have an excellent mortgage broker so no problem there.

Apart from increasing my salary way above 62k, I don't see how I can move on to IP number 4.

There are many people where with portfolios much larger than 3 IPs so I'm really hoping for information/advice on how people grow their portfolios beyond 3 IPs to give me an idea of where to go from here.

Any suggestions, advice or ideas will be appreciated because I'm stumped

 

[BV]

I think in situations like this the key is to have a good mortgage broker and to be buying properties with higher yields. Using different lenders will also help and as your equity and income grows you'll be able to add to your portfolio.

 

[skater]

My initial investment strategy has been to increase my portfolio to at least 6 IP's over the next 5 to 10 years. Ideally the portfolio would be cashflow nuetral or slightly positve at the end of 10 years. At the moment though I don't see how I can do that.

This is my situation
IP 1 - Valued 365k by residex Nov 2010, weekly rent is $250, owe 160k
IP 2 - Valued 303k by residex Nov 2010, weekly rent is $280, owe 153K

:

Your expecting your portfolio to be slightly positive at the end of 10 years? Maybe that is your main problem. Take a look at your current properties. You have a yield of less than 5% of the current value. Is that near to the value when you purchased them or have they massively increased in value and the rents have not caught up yet?

Why not see if you can draw down some equity to use as a deposit and move lenders. Somethime that will help, but also look at targeting properties with a higher yield.

 

[Jase H]

Your yield on IP1 seems terrible. Either you have been overly optimistic in its current value or the rent has been set way too low. On my calculations it is on a gross yield of only 3.5%

 

[Xenia]

You increase it with an all encompassing wealth plan that includes cash flow from other sources.

Or wait until property prices increase and purchase more through an equity release loan (I think that's what it is called)

the first way is what I do and faster

 

[Mick C]

Ur yields are very low, im guessing these are property is good area's? with a bit of growth hopefully!

It's good to have a mix of CF and CG properties....( keep CF, sell CG when it goes up- to buy more CF/potential CG)

I have to say, i only have a average portfolio of properties ( 1 unit, 1 house , 1 block of 6x2 units) but from my experience ( i'm 26 by the way, so only been investing for the last 7 years- plenty to learn!)

Ability to Buy more IP-
1. Good CF properties
2. Stable and good income
3. Low expense
4. Good accountant - i use to get 75-85% of my tax back; not at the end of the year but monthly... adjusted monthly PAYG ( doesn't work for self-employed unfortunately )
5. Increase rent- maybe furnished the place, change carpets? multiple rent?
6. Serviceability is the most important in term of finance! it's easy to get 5% deposit...but to service the required loan is always a barrier. - using a range of lenders normally helps in this regards...

Regards
Michael

 

[Peter_Tersteeg]

Hi Mindmaster,

A major challenge to your situation is that you're based in China and you need to demonstrate affordability for current and future loans.

Proving your income in a foriegn currency can sometimes be a little challenging, but it usually can be acheived. The real problem occurs when you convert income and expenses into Aussie currency.

Lenders look at a number of factors when determining affordability/serviceability for a mortgage.

1. Your personal income. Your take home income gets converted into its AUD equivalent. The problem is as exchange rates fluctuate, some lenders only take a percentage of the currency to compensate.

2. Your rental income. Assuming it's all against Australian properties, lender usually follow their regular policy, which is usually 75%-80% of the rental income. They only consider a percentage as the rest is to account for holding costs of the property (rates, management, etc).

Add these up, plus any other ongoing income, and you've got the income half of the equation. The next part is the costs.

3. Cost of existing debts. Lenders look at how much your existing debts (mortgages, credit cards, personal loans) are costing you each month. They usually assume an interest rate about 1.5% higher than the current rate to account for market increases when calculating repayments on mortgages.

3. Cost of living. This is the part which is hurting your affordability. Lenders apply a cost of living allowance. In China the cost of living is generally substantially lower than that of Australia. $60k income allows you to live like a king in China but is only a modest income in Australia. Lenders will apply the Australian cost of living allowance.

Take the total income and subtract the total costs. What's left is surplus income which could be used to service additional lending. Again the cost of the new loan is assessed at a premium (usually 1.5% higher than the current rate).

The problem with people living overseas and investing in Australia is that due to currency fluctuations and right now the high Aussie dollar, your income isn't as good as it might be (from an Australian point of view). On the flip side, you're also assumed to have a different cost of living than what your reality is, and being in China it's probably not in your favour.

*** Please note that the above description is in general terms and does vary substnatially between lenders and individual circumstances ***

Solutions to the problem could be in the form of increasing your Australian income. As suggested your rental yields are low. It could be time to review them (we got a 20% rent increase on our personal portfolio this year). Some minor improvements to the properties could also help this.

Other sources of income could also help. A share portfolio can add another income stream and can have some interest tax side benefits. The disadvantage of most alternate income streams is lenders need to see 1 or 2 full years tax returns to consider them.

 

[Mindmaster]

Thank you every one for your great replies and info

I think in situations like this the key is to have a good mortgage broker and to be buying properties with higher yields. Using different lenders will also help and as your equity and income grows you'll be able to add to your portfolio.

Hi BV. I have a good mortgage broker. Do need to concentrate on higher yields with next IP purchase. Don't like waiting for quity and income to grow but that would help.

Your expecting your portfolio to be slightly positive at the end of 10 years? Maybe that is your main problem. Take a look at your current properties. You have a yield of less than 5% of the current value. Is that near to the value when you purchased them or have they massively increased in value and the rents have not caught up yet?

Why not see if you can draw down some equity to use as a deposit and move lenders. Somethime that will help, but also look at targeting properties with a higher yield.

Hi Skater. I know that CF+ may be too ambitious so i'm flexible on my long term strategy. IP 1 has had good CG and started with bad yield that has not improved much. The house is basically a dump in a good street.

Using equity for deposit is not a problem. The main problem is that lenders will want a very high income for IP 4. An income that I can't see myself having at that time. That is my stumbling block in portfolio growth at the moment.

Your yield on IP1 seems terrible. Either you have been overly optimistic in its current value or the rent has been set way too low. On my calculations it is on a gross yield of only 3.5%

It is terrible. IP 1 is a dump on one of Sunshine's (Vic) best streets, King Edward Ave. Considered redevelopment but there are finance issues and probably better of to get IP 3. A reno to increase yield and value are something I'll look into but I don't think this will solve my long term portfolio growth stumbling block. Hopefully I'm wrong.

A granny flat could be an option too.

You increase it with an all encompassing wealth plan that includes cash flow from other sources.

Or wait until property prices increase and purchase more through an equity release loan (I think that's what it is called)

the first way is what I do and faster

Yup, that is what I thought. Increase income and/or wait. Waiting is way too passive so working on option one. May or may not bear fruit. Can't say at this stage.

Ur yields are very low, im guessing these are property is good area's? with a bit of growth hopefully!

I have to say, i only have a average portfolio of properties ( 1 unit, 1 house , 1 block of 6x2 units) but from my experience ( i'm 26 by the way, so only been investing for the last 7 years- plenty to learn!)

Michael

You are correct about low yields Mick. IP's are in Sunshine and Frankston North so decide for yourself if they are good areas.

Your portfolio is pretty impressive. Would you have trouble getting finance to add to it?

Your point on CF+ and increasings are good. I need to work out the details of how.

Hi Mindmaster,

A major challenge to your situation is that you're based in China and you need to demonstrate affordability for current and future loans......

......Other sources of income could also help. A share portfolio can add another income stream and can have some interest tax side benefits. The disadvantage of most alternate income streams is lenders need to see 1 or 2 full years tax returns to consider them.

Hi Peter, you have put a lot of effort and awesome info into answering my quesitons like you always do. One reason to start this thread on the forum instead of emailing you was to avoid taking advantage of your helpfulness. Not successful in this case

Your proposed solutions are in line with every one elses. Improve income by increasing yield from IP's and other additional income. IP1 went from $200 (crazy low I know) to $250 last month when the PM/RE finally put a gun manager on the case. IP 2 will go up $30 to $280 this month.

So need to find a way to further increase rent in a way that offers value to tenants and that the market can handle AND find additional income.

Thanks once again every one for your great responses.

 

[sash]

MindMaster

By looking at your portfolio your rent returns are extremely poor compared to the value.

One of returns (yield) is about 3.56% which. Typically properties in that price range is about 4.5-5%.

The other things to increase your serviceability which will qualify you for more lending:

1. Increase your rents every 6 months where possible

2. Wipe out all personal loans if possible...even if you have to redraw to pay them out. Their interest rates and way the loans are calculated will affect your serviceability

3. If you have multiple credit cards go down to on....lower a limit of say $3. Credit card limits whether amounts are on them reduced serviveability

4. Look at saving more - i.e. look at your budget. Look at things which won't hurt like better value Mobile, Homephone, and Insurances. I did this a couple of years ago....used to spend $100 on mobile now $50, Homephone was costing $150pm now about $80, and car insurance is paid yearly in advance which now costs $820pa instead of $1150.

5. Focus on higher yield properties...I am buying stuff in NSW which has 7.4-8.2% yields. These will help serviceability.

6. Look at mutiple lenders...one may say no...others will probably say yes.

7. Consider putting in a Income Tax Variation Form...if you are earning Australian income as it helps with CF.

This is my situation
IP 1 - Valued 365k by residex Nov 2010, weekly rent is $250, owe 160k
IP 2 - Valued 303k by residex Nov 2010, weekly rent is $280, owe 153K

I plan to reduce debt by 14k by the end of June to give a total loan value of around 300k.

Apart from increasing my salary way above 62k, I don't see how I can move on to IP number 4.

Any suggestions, advice or ideas will be appreciated because I'm stumped

 

[wobbycarly]

Cherry picking...

Hi Skater. I know that CF+ may be too ambitious so i'm flexible on my long term strategy. IP 1 has had good CG and started with bad yield that has not improved much. The house is basically a dump in a good street.

I think skater was surprised (as I was) to see that your goal is to be "slightly" positive after 10 years. One would typically expect to be "substantially" positive after that long (assuming no further purchases/debts). If you are still negative, you'd want the CG to be significant! Remember that for as long as you are CF-, you are relying on CG to compensate you. So the idea (generally) is to get CF+ as soon as possible.

3. If you have multiple credit cards go down to on....lower a limit of say $3. Credit card limits whether amounts are on them reduced serviveability

We've found that the limit doesn't matter too much; we can produce our Visa statements showing the CC paid off in full every month and this is taken into consideration. I also have an AMEX in my own name with a fairly high limit that I use solely for work purposes and get reimbursed. Similarly, the paper trail shows that this is not a liability.

 

[skater]

I think skater was surprised (as I was) to see that your goal is to be "slightly" positive after 10 years. One would typically expect to be "substantially" positive after that long (assuming no further purchases/debts). .

Surprised! Astounded! All that!

Yes, even if you have purchased something that is negative, it should be paying dividends by the time you get to the ten year mark. Mind you, like Nathan & Sash, I'm not a big fan of losing money on an investment.

 

[The Y-man]

There are many people where with portfolios much larger than 3 IPs so I'm really hoping for information/advice on how people grow their portfolios beyond 3 IPs to give me an idea of where to go from here.

Pretty much hit the wall at 3, increased work income (2nd job) and got the 4th (actually, my mrs works, so 4 each - total 8 - which makes it look more impressive than it actually is).

The Y-man

 

[redwing]

There are many people where with portfolios much larger than 3 IPs so I'm really hoping for information/advice on how people grow their portfolios beyond 3 IPs to give me an idea of where to go from here

Rixter has posted some great information for an average investor; not sure of the links but well worth the search

 

[Timriley]

Hi Mindmaster,

One option you might want to consider to obtain more than 3 investment properties is to combine your resources with some friends or family members and set up a small property syndicate.

A syndicate with 2 or 3 members who are prepared to share their time, knowledge, money and skills could collectively help you achieve your individual investment goals...

 

[skater]

Hi Mindmaster,

One option you might want to consider to obtain more than 3 investment properties is to combine your resources with some friends or family members and set up a small property syndicate.

A syndicate with 2 or 3 members who are prepared to share their time, knowledge, money and skills could collectively help you achieve your individual investment goals...

I would never recommend sharing finance decisions with family & friends. There are way too many complications and it is so easy for good relationships to sour when things go wrong.

 

[Mindmaster]

Thank you for your feedback Sash, wobblycarly, Skater, The Y-man, redwing and Timriley,

MindMaster

By looking at your portfolio your rent returns are extremely poor compared to the value.

One of returns (yield) is about 3.56% which. Typically properties in that price range is about 4.5-5%.

The other things to increase your serviceability which will qualify you for more lending:

1. Increase your rents every 6 months where possible

2. Wipe out all personal loans if possible...even if you have to redraw to pay them out. Their interest rates and way the loans are calculated will affect your serviceability

3. If you have multiple credit cards go down to on....lower a limit of say $3. Credit card limits whether amounts are on them reduced serviveability

4. Look at saving more - i.e. look at your budget. Look at things which won't hurt like better value Mobile, Homephone, and Insurances. I did this a couple of years ago....used to spend $100 on mobile now $50, Homephone was costing $150pm now about $80, and car insurance is paid yearly in advance which now costs $820pa instead of $1150.

5. Focus on higher yield properties...I am buying stuff in NSW which has 7.4-8.2% yields. These will help serviceability.

6. Look at mutiple lenders...one may say no...others will probably say yes.

7. Consider putting in a Income Tax Variation Form...if you are earning Australian income as it helps with CF.

Yup, agree with you on bad yields. Need to work on adding value and/or just increasing rents.

With points 2-4, I am doing well. Only debt is loans for IPs, only credit card is a debit credit card and save over 75% of my income.

IP 3 will definitely be much a better yield. I'm learning and improving.

Surprised! Astounded! All that!

Yes, even if you have purchased something that is negative, it should be paying dividends by the time you get to the ten year mark. Mind you, like Nathan & Sash, I'm not a big fan of losing money on an investment.

I misunderstood you Skater and though you meant I was too ambitious not the other way around. I've read too many threads/strategies on living on equity which made me think positive cash flow and living on cash flow which to me is much better, is very hard.

Pretty much hit the wall at 3, increased work income (2nd job) and got the 4th (actually, my mrs works, so 4 each - total 8 - which makes it look more impressive than it actually is).

The Y-man

I hear you about hitting the wall. I have a very clear view of the wall I'm goig to hit.

A 2nd job is one option but want to avoid that. May have to. See what happens. Getting married sounds much better

Did you quit your 2nd job after you bought IP4 or are you still doing 2 jobs?

Hi Mindmaster,

One option you might want to consider to obtain more than 3 investment properties is to combine your resources with some friends or family members and set up a small property syndicate.

A syndicate with 2 or 3 members who are prepared to share their time, knowledge, money and skills could collectively help you achieve your individual investment goals...

I like the idea of being a part of a group that shares advice, combines resources and support each other. Don't like the idea of sharing property ownnership though.

 

[The Y-man]

Did you quit your 2nd job after you bought IP4 or are you still doing 2 jobs?

I loved the second job so much and it helps my first job, so I'm still doing it 11years later!

The Y-man

 

[Timriley]

I would never recommend sharing finance decisions with family & friends. There are way too many complications and it is so easy for good relationships to sour when things go wrong.

Hi Skater,

You are right that sharing financial investments with family and friends is complicated. There are risks that need to be carefully managed.

However, depending on the strength of your relationships and the techniques you use to make sure you have managed everyone's expectations, the benefits of sharing can far outweigh the potential costs.

It's not for everyone, however if you are open and collaborative in nature then it could be option worth exploring...

 

[skater]

Hi Skater,

You are right that sharing financial investments with family and friends is complicated. There are risks that need to be carefully managed.

However, depending on the strength of your relationships and the techniques you use to make sure you have managed everyone's expectations, the benefits of sharing can far outweigh the potential costs.

It's not for everyone, however if you are open and collaborative in nature then it could be option worth exploring...

Tim, I'm not denying that there are a small minority of families that can, and do, make this arrangement work for them, however it is not something to go into lightly.

All you need is a small difference of opinion or a change of circumstances or expectations of one of the parties and you have major problems that could jeopardise the relationship.

Here is an example of two real life scenarios that I have witnessed.

Young girl buys a house and parents loan the deposit money with the understanding that it is a no-interest loan to be paid back in small increments. Girl meets boy, they marry and all things are going smoothly. Loan is getting repaid as per agreement. Father decides that it is not fast enough, so tells girl that she now has to pay 10%pa on balance of loan, which she does.

Girl falls pregnant & looses job. Boy is finding that things are not looking too rosey at his job either. They have baby and soon after find that another child is on the way. Still making payments to parents as per agreement, but now that they are paying interest on top of original payments, the balance is not reducing as quick as it once was and they don't have the capacity to pay more. Boy gets retrenched.

Girl tells parents that she is pregnant again and parents loose it! Big argument errupts because in the eyes of the parents the girl has decided to not pay them back even though they have not missed a payment. It is all somehow to do with the second child.

Parents send girl a letter of demand for the full amount of the outstanding loan, payable withing 21 days and they have no way of raising this, especially as they are now unemployed. Luckily they were able to withdraw from their Super to pay this under the terms for financial distress.

End result is that child/parent relationship has sustained irrepairable damage.

Second case:

Girl buys house. Girl decides to invest and buys a property, then goes into partnership with parents to help them out because they (the parents) have decided to do some reno/sell type developments to bring in some income.

They buy the homes, do the renos, but all the finance is tied to the income of children. The parents are older and are on an age pension, so they don't qualify for loans in their own names. The children are happy to help their parents out. At completion, all profit go's to parents.

Girl decides that she would like to move to a more expensive PPOR. She & her husband are earning good money between them & discover when looking to see how much finance they can get, that because they are tied to the family partnership, even though they don't have much in the way of assets in this partnership, they are part of an "all parties" type clause, which effectively means that they can't get the amount of finance they need to proceed, but they can't remove themselves from the family situation without causing huge problems either. They are stuck in limbo, so to speak.