IP portfolio that performs regardless of market movements!

Discussion in 'Property Market Economics' started by sash, 28th Oct, 2011.

  1. sash

    sash Member

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    Hi All,

    With all the doom and gloom around, I thought I would share a way to structure your portfolio which will perform whether the market is falling/flat or booming!

    As I have said previously, this is part of my risk mitigation strategy of buying properties with balanced growth and cash flow and tightening expenses.

    My portfolio has grow from about $1m to about $5m in about 6 years based on this strategy.

    The premise of this strategy is based on the following:
    1. Buy in 5 major cities or larger regional (i.e. over 100k in the greater
    catchment) metropolitan areas
    2. Buy with minimum of 7% yield with a view of increasing this to 9-10% in
    2-3 years
    3. Buy in areas with infrastructure improvements within 3-5 years
    4. Diversify your portfolio around the country - to reduce risk as well as
    reduce any land tax liabilities
    5. Balance between gorwth and CF - this the only optimum way to continue
    to grow your portfolio and your wealth in my opinion without significant risk

    Having said that..some of your investments may not always getting growth or cashflow. Unfortunately, this is happening across 2 properties in Qld and 1 in Melbourne (though the CG has been fantastic). But this only represents less than 20% of my portfolio...but my overall portfolio is still CF.

    So now down to the nitty gritty of my portfolio:

    1. My existing portfolio is geared at an LVR of 37% (would like this to be
    34%) this is despite me acquiring 3 properties this year for about 800k
    2. The overall portfolio is returning 5.1%
    3. The CF+ position once fully let (have 2 vacant due to reno) is around 3k
    per month
    4. Equity has grown 420% over 6 years

    My portfolio is structured in way it will perform whether the market is falling/flat (as it is now) or booming!

    How is this possible? Well easy to see property performs in a booming market...so no explanation required. As for falling/stable market...see below...

    I believe my portfolio will still perform in falling/flat market as rents and interests drop.

    My current IR repayments are about 126k per year. The rents have been stable or slightly dropping in the last year.

    Given that IR are about to drop (fixed rates have already dropped)...if my rates drop to an average of 6%....I will say about 30k in interest repayments. Further more I have started increasing rents by 5% which will bring about 7k in additional rent.

    So my 36k positve income will become 72k per annum if additional rent and interest reductions are included. If I take 4k for additional increase in costs I am at 68k ...not bad!

    Welcome any comments about my assumptions. This theory was tested in the GFC and is now on track to perform in the way....
     
    JameZ, fokas, Rickardo and 2 others like this.
  2. james_w

    james_w Member

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    Wow thanks sash very insight and helpful post and strategy a lot could be learned form this one nicely done
     
  3. dredfern

    dredfern Member

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    Hi Sash,

    That sounds fantastic and very inspiring. I would love to try and replicate this so have a few questions.

    I noticed one of your rules is to only buy properties with at least 7% yield, yet the current portfolio is currently returning 5.1% yield. Can you please explain whether this difference is due to some much lower yielding properties bringing down the average or whether the values have risen so much that the same properties would yield closer to 5.1% if purchased today?

    The low LVR seems to be a big key to the strong CF position? How did you get it down to such a low LVR in such a short period? Are you paying interest and principal to pay down the debt or interest only on your loans and waiting for CG?

    How long has it taken you 'in total' to get to this position?
     
  4. ali

    ali Member

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    Thanks for sharing, Sash. Very insightful and motivating reading for someone starting out, as I am.
    Cheers, Ali
     
  5. YvonneVincent

    YvonneVincent Member

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    Hi Sash thx for sharing!

    Got a question as to whether or not u do any subdivision etc or sticks to the buy hold +occasional renovation to bring the proeprties back to rentable status?
     
  6. sash

    sash Member

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    DRedfern

    The reason why the yield is down is because of capital growth..so your assumption is correct. For example a property I bought for 232k is now rented for $350pw. The yield on this is about 7.8%....but the value is about 285k. If used the yield on a conservative market value...in the above case it would be 6.3%.

    The low LVR is a combination is mostly due to CG....but I also pay down loans quickly via 100% offsets. Compounding interests brilliantly....adding the excess CF from the properties further trubo charges debt reduction!


    Yvonne...I simply buy and hold. In the last 2-3 years I have been doing the renovations to manufacture growth. As I have held some for sometime and they were not in the best of condition I have now try to refurbish 1-2 properties to being them to a good state so I don't get nailed with renovating 3-4 properties like this year. I did not do these myself...but a real pain.

     
  7. virgo

    virgo Always-willing-to-learn

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    Hi Sash

    Thanks for sharing! i have only started investing in the last 4 years but already experiencing a little of what you are saying. If interest rates drop 1 % (or i lock in with Newcastle Perm at 5.99%) i will actually be 17K positive:)
    2% and i will be very happy:)

    My IPs yield (on original cost) range from 7-9% roughly...my latest granny flat will yield gross 20%..

    i am starting to feel paralysis about buying more; seems to be too easy this ride! DO you feel that too? How do you keep going on?

    I find that i am now chasing positive cash flows rather than capital growth. As long as the values do not plunge (and no margin calls on property right??:p) who cares! THe passive cash flow is what i am reaching for for hubby to be able not to rely on his job! Plus banks are still quite happy to loan me...

    One question : you are in a sweet position; but how many IPs do you need to get there ( i mean 6 mil is quite a lot) ...and i know you buy in less affluent areas too...and do you intend to buy more?

    Thanks once again for affirming my approach!:p
     
  8. tess85

    tess85 Addicted to SS

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    Great thread! Like virgo I have only started investing really, these past couple of years - but my plan is very similar to sash's (well, maybe partly inspired by his forum posts!) I know sash has been at it a lot longer and has reaped the rewards. Well done, your post was very inspiring.

    Did you ever reach a serviceability wall? I recall that you have a fairly high PAYG income so it would be interesting to know if this is what kept you being able to purchase property after property.

    If all goes well I'll have 3 IPs by the end of this year - the banks are happy to lend us for one more (IP4) but I think the money will dry up by then! Curious for any tips for buying more IPs. With such a low LVR it doesn't seem like you refinanced much.

    And, just for fun... I was wondering if you invest in Tas? And have you hit the land tax threshold in every state?
     
  9. tess85

    tess85 Addicted to SS

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    Oh, and did you sell any along the way, and if so... why?
     
  10. dredfern

    dredfern Member

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    Thanks Sash,

    Can I ask, given the above example of 6.3%, and also the others in your portfolio that are currently around 5.1% based on todays values/rent. Would you still be buying them today as a new purchase or excluding them from consideration since they are below 7%, based on your strategy?
     
  11. sash

    sash Member

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    a pleasure to confirm your strategy! :)

    Yes some days I see so many deals...I was thinking I should be a buyers advocate! Usually, I will just pass these deals to my mates....very few act on them. I will keep going as I want to hold about $10m in real estate by 2017...I will be 50 by then! That should provide a good lifestyle...assuming borrowings of $3.7m and CF+ of about 100-150K. Might celebrate by buying a Mercedes E250 CGI! ;)

    I am changing my strategy slightly to target newish properties ..well at least stuff build after 1990. Why??....because this gives me depreciation which will assist me minimizing taxable income and the need for renovations. As a matter of fact I have found some awesome H&L land deals which I am investigating. The properties are low end ....but still within reach of the FHBs.

    Oh...one thing I forgot to mention earlier is set yourself targets...similar to a business plan. I set my target initially at $1m in assets...that too be about 5.5 years. The I set $3m...that took about 3-4 years.....then $5m...now have set $10m. The last target will be trickier as it requires real skill and I expect it will be harder than growing to $5m.

    I suspect I will take 25-30 properties to hit $10m assuming the average property is worth $335k - $400k by 2017.




     
  12. devank

    devank Why why why?

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    Thanks for this Sash. I'm at the stage where you were 6 years back. So it is very helpful and also happy to read your post.

    Few questions... please don't take this as an argument or picking on you. I'm simply trying to understand.

    What was your Loan amount 6 years back?

    Is this yield calculated based on the current value (may be purchased value) or the loan amount?

    Is land tax that bad (apart from NSW)?

    LVR 37% means that your properties must have increased their value a lot from 2005 to 2011. Where & how did you find these places?!?

    I have to bring back the LVR to 75-80% if I need to buy a property then wait. Your 37% LVR and also increasing assets is really amazing.

    I think the moral of your story is to chase the capital increase. Cash flow will follow. That comes down to your ability to pick the right location/ property.
     
    Last edited: 28th Oct, 2011
  13. sash

    sash Member

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    Tess,

    Nope...like survivor..I out played, out smarted and out weasled the banks! :p Yes, I have a relatively high income...it helps...but someone on 50K can still own $2m in property if they get started...easier for them to replace their income than mine!

    I refinanced heaps this year and got rid of some lenders...as I wanted the 100% offset and better rates.

    I looked into TAS as the returns are high and prices cheaper...but decided to sitck to larger cities. Some people have made a killing there.

    Tess,

    I was silly man and sold 2 just as GFC was hitting.....one of those would be worth $80k and the other $50k more. Both were units. Ya live and learn I suppose!

    Dredfern

    Nope....the yields are too low! I am believer that high yields at sometime will drive price growth in metropolitan areas...it is different in country towns. For example when I bought a 3 brm house in Werribee VIC in 2006 for $130k with about 180pw in rent. This now rents for $245pw about a 10% return. I have however spent about 11k on the house in renos. The house is worth about 265k...so aobut a 90% gain in 5 years not bad!

     
  14. virgo

    virgo Always-willing-to-learn

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    Strategy

    Hi Sash

    If you don't mind; how did your ppor figure in your strategy earlier on?

    Did you 1) rent or 2) live in a "cheap" place or 3) what the heck! live it up?

    And what about now? Do you 1) or 2) or 3)??

    And dare i ask; where do children figure in your strategy? Cos we know they are money suckers! Did you find they were a stumbling block ? (only asking as i am thinking of returning them and asking for a refund you see?!!:p)
     
  15. Aaron_C

    Aaron_C Finance Broker

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    I don't really agree with the strategy of buying (small) properties in many different states just to save a bit of land tax.
     
  16. sash

    sash Member

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    Devank,

    I think your questions are reasonable....and don't worry I have a think skin from people laughing at me at the areas I invested in!:p

    Please see my answers to your questions....

    What was your Loan amount 6 years back? I think it was about 365k and I was freaking out at this level of debt back then!...pocket change now

    Is this yield calculated based on the current value (may be purchased value) or the loan amount? Yield is based on current value based on a conservative estimate. If it was purchased value it would be over 10-11% on average (some lower some higher)...havent done the numbers but it would be around that


    Is land tax that bad (apart from NSW)? Yes...I think I will be up for over 7k at 31 Dec.
    LVR 37% means that your properties must have increased their value a lot from 2005 to 2011. Where & how did you find these places?!? Found the ideas reading mags like API, Hotspotting, seminars, etc. Primarily focused on yield and then looked at growth potential. I tend to stick to large cities.

    I think the moral of your story is to chase the capital increase. Cash flow will follow. That comes down to your ability to pick the right location/ property.

    Actually the opposite use yield as the initial filter and then research what potential for the suburb is. Affordability and amenities are key as well as infrastructure changes.


     
  17. sash

    sash Member

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    I have my own place but now have cheap rent via familty owned property. But that has to be balanced against my 300-400pw cafe and restaurants bills. :p

    Ask for refund ...children are expensive...I will acknowledge but then you have two incomes! As for my children....none that I know about!...just kidding!


    Each to their own....I see you are in Victoria...what are you going to do now as Vic is expected to have the lowest growth outside of possibly Western Melbourne??

    Also would like to know details on where you have made money?

    One of the reasons my strategy has worked is because I went outside of NSW when it was performing poorly from 2004-2009. I rode the back of the boom in Victoria and SA!...well Qld ...not so much!

     
  18. dredfern

    dredfern Member

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    Thanks Sash,

    Does your CF calculations allow a certain percentage for repairs?
    And do you find you spend a lot more on repairs on your older properties vs your newer ones or similar?

    Also are you able to reveal where your 3 purchases were this year.
    And where you are targeting next?
     
  19. sash

    sash Member

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    I allow about $5000 per year per property for repairs, rates, insurance, land tax, etc. Large renos would be outside this....but I find I very rarely all the $5 allocated across my portfolio.

    My purchases were Barrack Heights bought for $246k and currently rented for $345pw.....next one was New townhouse in Wattanobbi with own frontage bought for $232 rented for $350pw....then Maitland house 207 plus 25k reno ...rented for $340pw.

    I am looking at WA and SA...both in Northern suburbs there.....can buy houses for $300-320k and 210-220k brand new and rent for $400pw and $310pw respectively. Upon completion these should be worth $370-$400k and $270-280k respectively.

     
  20. Corey Batt

    Corey Batt Finance Broker

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    Adelaide Northern Suburbs... $210-220k @ $310 p/week. What suburb are you looking at? Low end Playford Alive?