IP#1. How to accelerate/refine my investment strategy.

[Richard Feynman]

It's time to buy IP#1. I'd love some input on my strategy, and how I may best accelerate the growth of my portfolio from day 1. Essentially, I want to be in a position to buy IP#2, #3 etc as soon after the first as possible. Whether that's by buying cheap CF+ properties, renovating for equity or something else.

Income:
-
- $2000+ bonus/other
- $1000+ airbnb

PPOR:
- $245,000 owing
- Fixed @ 8.09% for 12.5 more years (I know, I know)
- $10,000 a year extra repayment max (which I am meeting, but doing so eats the majority of my surplus cash annually)
- Experiencing good growth at present, 5-7% last 12 months. Likely to continue.

Finance:
- $60,000 equity pulled from PPOR for deposit/holdings
- ~$350,000 further borrowing capacity

Retirement:
- Want to have option to retire on no less than $50,000 in today's dollars, within 12 years, with an appreciating asset base

My basic plan is to first buy a couple of cashflow positive properties. NRAS for #1 (CF+ ~$5000+) and, if I make it before the scheme is over, NRAS for #2. This consistent surplus cashflow can then assist in deposit/holding costs for neutral or negatively geared/higher risk properties in which I chase CG.

I'll extract any available equity from PPOR and NRAS to help with additional purchases.

So, that's the plan. Get some CF+ properties first to help service future CF-, higher growth properties.

Is this strategy reasonable? What are potential pitfalls/risks? What are the pros? Will I hit serviceability walls? What have I missed? Alternative ideas to progress quicker?

Other options I've considered:
- Buy 2 x places under $175,000 immediately ?€“ non-NRAS, but high yield, expecting CG.
- Limit IP#1 budget to ~$250,000 ?€“ non-NRAS, but high yield, leaving $100,000 spare to allow me to grab IP#2 sooner
- Seek out "worst house on best street" for under $300,000, dip into the $50,000 to renovate (I have no reno skills myself, yet), attain higher yield and manufacture equity for another deposit. Repeat.

To further push things along, I will consider moving out of PPOR (instant IP!) into a very similar rental. That's over $6k of interest I can then deduct annually. Minus moving costs etc, should still be at least a few extra grand in my pocket.

So, I've love some input on the best way to accelerate things along.

One last note, during this process I'll be spreading some of my cash into other asset classes (index funds etc) though property is very likely to remain predominant. I know this will slow my property investing a little.

Thanks.

 

[Richard Feynman]

Oh, I forgot. I'm completely open to ALL input. Including directing initial funds somewhere other than property if anyone has a good case for it.

 

[Shahin_Afarin]

Are you converting the PPOR to in an IP? If you have aggressive plans not sure whether its a good idea to put all excess funds in the fixed loan unless you have a redraw facility attached to the loan (some lenders do and some don't)

With those purchase prices - I would be considering 95% lends. Build a long term plan which will dictate at what LVR you borrow and when you borrow it.

 

[The Y-man]

Income:
-
- $2000+ bonus/other
- $1000+ airbnb



So, I've love some input on the best way to accelerate things along.

.

Increase the worked income. IMHO job income is one of the most overlooked and underrated accelerator (RK probably has a lot to answer for).

Could be:
Job upgrade (you may need a skill up)
multiple jobs (way we did it)

Stating the obvious, but it is much easier to do your plan on $150k pa.


The Y-man

 

[Aaron_C]

Increase the worked income. IMHO job income is one of the most overlooked and underrated accelerator (RK probably has a lot to answer for).

I guess that's true but I think RK's main point is that people tend to focus on job income to the exclusion of all others. Having more of everything is objectively better of course.

 

[Terry_w]

Richard,

Whats the break costs on that mega long fixed loan?

Consider moving out and renting this property, breaking the loan, claiming the break costs (if possible) and then get a loan at half the interest rates.

Or if it was a rental you could keep the fixed loan and just negatively gear it.

Both may be a bit of a hassle for the family though, and there are other considerations.

Watch out with cash flow positive property - don't give up capital growth for a mere $30 per week.

 

[Richard Feynman]

Thanks so far for the input all!

Are you converting the PPOR to in an IP? If you have aggressive plans not sure whether its a good idea to put all excess funds in the fixed loan unless you have a redraw facility attached to the loan (some lenders do and some don't)

With those purchase prices - I would be considering 95% lends. Build a long term plan which will dictate at what LVR you borrow and when you borrow it.

I will be converting it at some point, yeah. This could be any time within a few months or 5 years though. No redraw, but I'm able to draw equity back up to 89.9% without paying much LMI. Since my interest rate is 8.09% I believe this is the best use of the $10,000 annually as I can basically get to most of it it when I need it and it's making an 8.09% return in the mean time. Input?

Increase the worked income. IMHO job income is one of the most overlooked and underrated accelerator (RK probably has a lot to answer for).

Could be:
Job upgrade (you may need a skill up)
multiple jobs (way we did it)

Stating the obvious, but it is much easier to do your plan on $150k pa.

Thanks. Income is my biggest obstacle, I know. Since graduating, I've been increasing my skills with the aim of increasing income. I failed to mention that in my line of work I can take on freelance jobs and pull anywhere from $5-$15k annually (been there, done that), but now I prefer to keep that to a minimum as the hours of life lost aren't worth it. My day job w/transit already eats 11+ hours, 5 days a week. I will continue to freelance as I please, but I'm not banking on much from this source of income.

I've mastered frugality, and am thriving and happy so at least I've got the other end of the earning spectrum (not spending) sorted.

Whats the break costs on that mega long fixed loan?

Consider moving out and renting this property, breaking the loan, claiming the break costs (if possible) and then get a loan at half the interest rates.

Or if it was a rental you could keep the fixed loan and just negatively gear it.

Both may be a bit of a hassle for the family though, and there are other considerations.

Watch out with cash flow positive property - don't give up capital growth for a mere $30 per week.

Break cost was $40k prior to the last rate move. Will be over that now. I will be breaking the loan once a) It's an IP and b) rates have gone up enough to make it worthwhile. If I break now from 8.09% to 5%, it'll take at least 6 years to recoup the loss by my count. This will hurt my progress massively too (equity hit).

No family to worry about. As mentioned above, the idea of moving out within a few months is under consideration. I can afford to hold the property if I do this and it will help with cashflow.

Good point about cashflow v CG. An NRAS property should provide at least $100/week for a decade, which I presume would help in accelerating my plan and allow me to then grab some CF- places with the aim of CG.

 

[Peter_Tersteeg]

Purchasing an NRAS property is good for your immediate cashflow, but it is a potential disaster for your serviceability. The problem is most lenders won't recognise the tax benefits of NRAS properties in their calculators, they'll just use the actual rent you're getting (which is below market).

If your strategy behind the NRAS purchase is to increase your ability to purchase more properties, you may find it does the opposite.

 

[jrc77]

PT,

Interesting you mention that, it's something I am considering at the moment.

I have loans with CBA that I use for deposits on IP's. Say I bought a NRAS property (80% loan with a NRAS lender - Firstmac for example) and deposit/costs from a CBA loan (secured against something else).

When I next go to hit CBA up for a top up, would it be safe to assume that they would accept my NRAS property rent (20% less than market) for servicing but not the tax offset? Not sure if CBA include negative gearing benefits.

This would obviously have a significant detrimental affect on servicing calculations although may not be catastrophic if you have enough alternate income.

Regards,

Jason

 

[S.T]

My day job w/transit already eats 11+ hours, 5 days a week.

I've mastered frugality, and am thriving and happy so at least I've got the other end of the earning spectrum (not spending) sorted.

Hi Richard, I have to admit I'm only new to frugality, but having read a bit of MMM's blogs one of the things he stresses is to live close to where you work and bike/walk to your job. Maybe this is something you could look at adopting to help save you a bit extra? This would also see you convert your PPOR into an IP and you could look at renting close to work?

Just some ideas that you may already have thought about.

 

[Richard Feynman]

Purchasing an NRAS property is good for your immediate cashflow, but it is a potential disaster for your serviceability. The problem is most lenders won't recognise the tax benefits of NRAS properties in their calculators, they'll just use the actual rent you're getting (which is below market).

If your strategy behind the NRAS purchase is to increase your ability to purchase more properties, you may find it does the opposite.

Something I'm mindful of, though I admit I haven't the knowledge to know how much this will impact me.

Assumptions:

1) 3% avg CG for the 10 years of NRAS = cashflow neutral once the decade is up and I'm back to market rent.
2) My income will increase at least with inflation annually. Likely more.

My thoughts were: NRAS cashflow ($5-7k annually) after tax is still more than the missing 20% of rental income. I'm not sure of which lenders factor in the NRAS $10k incentive for servicing (apart from firstmac and I think Adelaide bank?) but I was aiming to get finance from a lender that doesn't factor in the NRAS $10k incentive for IP#1, IP#2, and only go down that avenue when I do hit a serviceability wall with other lenders.

Can you provide any more info on what serviceability problems I'll run into going down the NRAS path? And if it may be to my advantage to buy/hold property that's negatively geared but experiencing decent CG in terms of accelerating my plans?

Much appreciated.

Hi Richard, I have to admit I'm only new to frugality, but having read a bit of MMM's blogs one of the things he stresses is to live close to where you work and bike/walk to your job. Maybe this is something you could look at adopting to help save you a bit extra? This would also see you convert your PPOR into an IP and you could look at renting close to work?

Just some ideas that you may already have thought about.

Thanks for the input. Great advice for almost anyone, but points I have thought about.

Unfortunately, moving closer to work would mean moving from a circle of brilliant friends (not worth it, I'd spend so much time/money getting back to them on weeknights and weekends). Further, I actually thrive on the 55 minute (each way) trip to/from work. I make particularly good use of the time (reading most often which is one of my biggest forms of pleasure, other times meditating etc and don't view this as time lost, but time well spent).

I do own a bike, and ride everywhere locally. Were I to ride to work, I'd have an identical commute time, but be unable to productively use the time (other than fitness, which I'm already on top of), and after extra food to replenish lost kilojoules, I'd be well under $1000 a year better off in saved train tickets for 500 hours of "lost" time.

Thanks again folks. Keep it coming. I really appreciate it.

 

[Mindmaster]

Hi Richard,

This thread on low income property investors building portfolios has some great info that may be useful to you

http://somersoft.com/forums/showthread.php?t=87581&highlight=driver

 

[Richard Feynman]

Hi Richard,

This thread on low income property investors building portfolios has some great info that may be useful to you

http://somersoft.com/forums/showthread.php?t=87581&highlight=driver

It has been useful to me

 

[Peter_Tersteeg]

Something I'm mindful of, though I admit I haven't the knowledge to know how much this will impact me.

Assumptions:

1) 3% avg CG for the 10 years of NRAS = cashflow neutral once the decade is up and I'm back to market rent.
2) My income will increase at least with inflation annually. Likely more.

My thoughts were: NRAS cashflow ($5-7k annually) after tax is still more than the missing 20% of rental income. I'm not sure of which lenders factor in the NRAS $10k incentive for servicing (apart from firstmac and I think Adelaide bank?) but I was aiming to get finance from a lender that doesn't factor in the NRAS $10k incentive for IP#1, IP#2, and only go down that avenue when I do hit a serviceability wall with other lenders.

Can you provide any more info on what serviceability problems I'll run into going down the NRAS path? And if it may be to my advantage to buy/hold property that's negatively geared but experiencing decent CG in terms of accelerating my plans?

It's really not possible to give you any specific advice without knowing a lot more about your circumstances on a deal by deal basis, but you've essentially acknoweldged my point by suggesting a strategy of using the few lenders that do take NRAS into account as a last resort basis.

The problem is, using NRAS will likely accelerate the timeframe in which serviceability does become an issue. Additionally there's no guarantee that lender policy will remain constant over a medium or long term timeframe.

This could be in your favour if other lenders start to acknowledge NRAS, but given that no lender acknoweldges depreciation tax deductions I wouldn't rely on this. My gut feeling is that over time NRAS will become harder to finance, not easier.

 

[Richard Feynman]

Thanks Peter.

Question to anyone, how much difficulty/what sort of LVR would I be looking at if I was purchasing a studio around the 32sqm size?

 

[Aaron_C]

Thanks Peter.

Question to anyone, how much difficulty/what sort of LVR would I be looking at if I was purchasing a studio around the 32sqm size?

Difficult. Max 80%

 

[Terry_w]

Thanks Peter.

Question to anyone, how much difficulty/what sort of LVR would I be looking at if I was purchasing a studio around the 32sqm size?

Very difficult. Only a handful of lenders would do something that small. LVR max 80% with some lenders but not many.

These are not generally a good investment because of the difficulty in financing.

 

[Peter_Tersteeg]

Thanks Peter.

Question to anyone, how much difficulty/what sort of LVR would I be looking at if I was purchasing a studio around the 32sqm size?

It'll probably be the worst investment you ever make, there's a reason why lenders don't want to fund these sort of properties.

The resale opportunities are very limited, only a small percentage of the market is interested in these sort of properties. With limited resale, capital growth is going to be limited as well.

The cash-flow is likely a lot less than you've been led to believe. I've seen a number of people purchase studio apartments on the promise of good rental income, but they're never told about the turnover, vacancies, high management fees, maintenance. These investments often have far worse actual cash-flow than regular apartments.

The absolute best you'll be able to finance is 80% of the value, but that's only with a select few lenders. Most will only go to 60% or 70%, others won't touch them at all. There's also a significant chance of the property being valued below the purchase price.

If the banks don't like these types of investments, with all their research, accumulated data and actual experience with these types of deals, do you really think it's something you should consider?

 

[Richard Feynman]

Thanks again folks. I'm aware of many of the pitfalls of studios (turnover, difficulty selling, slow CG and financing troubles). Didn't know valuations often come in under purchase price though.

My curiosity arose though, as I wondered about this hypothetical situation purely in terms of numbers/possibility. Have I missed anything major?

- Buy studio under $250,000 with 20% deposit
- Loan repayments approx P&I $275/week @ 6%. IO $230/week @ 6%.

This would essentially mean loan repayments $75/week or $120/weekly (respectively) below what renting a 1 bedroom identical to my own place would cost ($350).

I'd love more input, I still have plenty to learn on all fronts.

 

[Shahin_Afarin]

Yes but a) the number is based on 80% purchase costs instead of 105% and b) you have only taken the loan repayments as the outgoings - what about the insurance, water rates, strata, etc?