Is the Buy and Hold Method still an appropriate strategy for building wealth?
- Thread starter jingo
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Agreed. To assume otherwise is to think your 20% deposit is going to come from savings each time rather than the equity fairy through portfolio. Rather unrealistic IMO. It also helps to know (because that is the reality under the equity growth for deposit situation) that you are really not putting any money down, you're only increasing the risk of the bank taking extra security over your portfolio.
Therefore if there is any growth, return on equity invested is infinite. Nothing wrong with that!
And positive cashflow as well on the full value of the property makes for less risk, even if the perception of the property type may be that it is "high risk" (ie CIPs for example).
In regards to the 400k cash deposit in exchange for 800k over 10 years is extremely low.
In many cases, the investor only makes one initial deposit and uses equity for all other purchases. Meaning they have only used a very small amount of their own money (first deposit and whatever holding costs after tax).
I know in my situation (which is certainly nothing out of the ordinary), I made one deposit of $40,000 and now control a multi-million dollar portfolio in a very short period of time.
I've added around $15,000 in holding costs after tax to date and as I haven't done anything special I'm thinking that many others would have made an initial deposit and made money from rents so would now be in front and actually been "paid" to invest if you get what I'm saying.
In many cases, the investor only makes one initial deposit and uses equity for all other purchases. Meaning they have only used a very small amount of their own money (first deposit and whatever holding costs after tax).
I know in my situation (which is certainly nothing out of the ordinary), I made one deposit of $40,000 and now control a multi-million dollar portfolio in a very short period of time.
I've added around $15,000 in holding costs after tax to date and as I haven't done anything special I'm thinking that many others would have made an initial deposit and made money from rents so would now be in front and actually been "paid" to invest if you get what I'm saying.
Very true
That's a good question PB. It would be interesting to know how long it took people here to reach the 50%LVR and 1mil equity. Perhaps there is a poll on this somewhere??
The 20-30 yr ride sounds like an eternity. What are people doing to speed this up??
Regarding the 30 yr ride, I'm not sure what you guys mean?
It would take an investor around 10 years to achieve $1 million equity if they held a $1 million portfolio 10 years prior. Not 30 years
I think thats quite standard.
It would take an investor around 10 years to achieve $1 million equity if they held a $1 million portfolio 10 years prior. Not 30 years
I think thats quite standard.
I take the 20-30 yrs to mean total financial independence from buying and holding residential property rather than the time it takes to reach 1M and 50% LVR.
if it takes 20 years to become financially independent - i think that's a great time frame.
start when you're 18 and by the time you're 40 you're retired.
what's wrong with that? why would you want to speed that up?
start when you're 18 and by the time you're 40 you're retired.
what's wrong with that? why would you want to speed that up?
Well depends on what you want to get from life and how soon.
I see your point now, didn't know you were talking about financial independance. But I will say that many have done it in 10 years, let alone 20-30. Just depends on how hard you go, luck, and how you go about it.
I see your point now, didn't know you were talking about financial independance. But I will say that many have done it in 10 years, let alone 20-30. Just depends on how hard you go, luck, and how you go about it.
That's a big call Michael! Particularly when there are other asset classes that offer all of the benefits you outline but come with a better yield...
In any case, we all know there is no such thing as "residential property investment". There are only particular properties available for purchase. Choosing the right ones can make all the difference between 5 years and 50 years...
Because I want to spend more time with my kids while they are still young and still want to spend their time with me! And I still want to go kitesurfing while I physically can. And I might get a terminal illness at 39. And I want to keep fit and healthy and find that difficult while holding down a full time job and want to see my kids. And....
You get the idea... some assets are (much) better than others to purchase and get you there much quicker, without necessarily taking extra risks. Why wouldn't you want to speed up the process?
You must know something I don't. Which other asset class has all the following:
1. 80% lend against initial valuation without insurance.
2. Cash yield about 5%.
3. Non cash deductions permitted against unrelated salaried income from things such as depreciation.
4. Preferential treatment by the government in supporting its capital value.
5. Capital Growth in line with inflation or better.
6. Up to $30K odd gift from the government when you buy your first asset in this category.
7. Capital Gains tax free on disposal if its the one you live in and discounted rates over time if not.
That makes for a pretty unique asset category IMHO.
And, yes, I meant 20% CASH for the first one. From then on in its all about monitoring your LVR and using equity down on subsequent purchases. But with all that equity growth you can maintain a total portfolio LVR of less than 80% which keeps it nicely neutral or better. Most investors I've spoken to like to keep their LVR around 50% which really means you've got a fair bit of spare cash flow to help you along. You don't rip every cent of equity out of your portfolio to purchase new acquisitions. Banks only lend to 80% without LMI anyway for LOCs, so your portfolio should never go above 80% LVR even though an individual new purchase in it might appear to be 100%.
Put simply:
IP1 initially 80% lend 20% CASH
In time, it grows in value and you pull an LOC against IP1 out to fund the deposit on your next purchase of IP2.
IP2 now is an 80% lend and IP1 might be BACK to around 80% lend after the LOC top-up, but not more than this!
At no point is any of these IPs at 100% lend. Even if you use an LOC as deposit, its actually an LOC secured by ANOTHER property which itself is still below the 80% lend mark. So, the total portfolio never tops 80% total lend. Cross colaterising the whole thing together is not an issue as far as I'm concerned. Treat it as a portfolio. Watch your portfolio cash flows and your portfolio leverage. New acquisitions at 80% lends might be marginally negative initially if they stood alone, but they don't. Its the portfolio cash flow that counts, and the portfolio leverage that the banks are worried about when lending for the next one.
Cheers,
Michael
I think Michael you missed one point. If you happen to buy in any of the metro cities it's value has never gone down to zero dollars!!!
Cheers,
Oracle.
Well that list looks a little different to the one you posted up earlier in this thread, which is what I was referring to! Nevertheless, to respond to this list, there are CIPs for sale out there, which offer, today:
1) 60% lend without insurance at generally higher IRs (the one negative)
2) Cash net yield around 10% (twice 5%)
3) Depreciation as per RIPs
4) Significant support from govt just in a different form
5) Capital growth at least as good as RIPs, often better due to the higher value of the land use in the first place.
6) FHOG gifts are not available for resi property investors - only first homebuyers... and can't be used more than once anyway for that purpose.
7) Discounted CGT applies just as well and if you live in an IP then it's not an IP - it's your home...
8) Better tenants (reputable, large companies etc)
9) Tenants pay all outgoings
10) Longer secure leases with ratcheted / market rent increases, some up to 10 years
11) No PM headaches - tenant has to fix stuff themselves
12) Bank guarantees for payment of rent around six months worth
13) No tribunal hearings and tenant sob stories
14) Lease conditions heavily in favour of the landlord, instead of the tenant
15) Lots of notice of vacating tenants to allow you time to find a new one
16) You get the idea...
My point is not that one is better than the other - you can come unstuck big time with both just as you can make a lot of money with both. I just dislike blanket statements like "nothing is better than RIP investing" when it has been demonstrated many times that people have made an awful lot more money with other investments than we ever will out of our little houses... and that is what counts!
Have to disagree with you there. If you want to buy a $400k house for IP#2 using your equity as security for the deposit then you have to borrow $400k + costs = circa $416k. To me that means I'm borrowing 104% of the price for each new acquisition after the first, regardless of the other security the bank has. So the yield on each new one has to pay for all of the interest bill on the total amount of the cost, including SD etc, not just 80%. Hope that clarifies things...
In a bull market we're all experts. But never before in the last 50yrs has finance been that easily available and the gov handed out incentives for people to buy RE.
Even so, the late 60's-early 70's seen a bull market that was stronger than last one with gov meddling & inflation playing a role.
Will it happen again? I don't doubt it.
When will it happen? If I knew i would tell, but I doubt anyone here knows either.
Of course if you say "boom" every month (like Mr Yardney), you'll be right sooner or later, and then tell the world your an "expert".
My point:
6. LMI is bad, and means your LVR is too high.
Means that lvr should be kept low, be it one or 10 IPs.
As far as CF is concerned I would consider each IP a separate income stream that should be CF+ if it is RIP.
BC you have to earn the money before you can save it.
You earn it from wages, CF from investments, dividends, trading or working the street if that's wat you fancy. In the beginning it's slow, but the CF is very useful when banks stop throwing money out of the back of trucks.
HiEquity CIP is what you say, but it can go down just as fast as it goes up.
ie volatility.
From my experience RIP has some form of bottom price, and a much larger market on the bid side that makes it a safer investment.
CIP also has a base value (land content is gr8) but seems more a revenue base investment when it come to it's valuation.
The good thing is that LVRs are forced to be low by the lenders generally giving some security.
I'vs seen CIP values do this: from 2mil ->1mil -> 4mil ->1mil -> 5mil = sold
in ~20yrs.
Challenging one's own investment path
Great responses to this thread so far, with good debate - both for and against buying and holding RIP for the long term.
One of the reasons I re-read Jan's book and posted the thread is because I am challenging the merits of our own investment path. (Which has essentially been a buy and hold RIP, together with buying some shares and holding cash to pay down debt etc) So far the strategy has been working well.
However, we are at the stage now whereby if we chose to sell our IP's and invested in shares, (debt free) the proceeds would be enough to generate a very good income stream. This would effectively allow my wife and I to wind down our work to part time. We could enjoy long periods of time where we didn't need to work, spending this time travelling overseas etc.
Holding our assets as they are will see us do very well in the long run. But Hi Equity raises a great point - spending time with our family is a high priority, and selling down (in a staged manner) would allow us to do that comfortably now - while we are still relatively young!
So rather than taking 20-30 yrs, the process would have taken us 8yrs if you count the time we started investing in IP's and 12yrs if you count the time we first bought our PPOR. 20-30 yrs sounds like a life sentence to me! I don't know how others react when they think of the length of time involved!
Lots for us to consider!
Have enjoyed reading everyone's responses.
Regards Jason.
Great responses to this thread so far, with good debate - both for and against buying and holding RIP for the long term.
One of the reasons I re-read Jan's book and posted the thread is because I am challenging the merits of our own investment path. (Which has essentially been a buy and hold RIP, together with buying some shares and holding cash to pay down debt etc) So far the strategy has been working well.
However, we are at the stage now whereby if we chose to sell our IP's and invested in shares, (debt free) the proceeds would be enough to generate a very good income stream. This would effectively allow my wife and I to wind down our work to part time. We could enjoy long periods of time where we didn't need to work, spending this time travelling overseas etc.
Holding our assets as they are will see us do very well in the long run. But Hi Equity raises a great point - spending time with our family is a high priority, and selling down (in a staged manner) would allow us to do that comfortably now - while we are still relatively young!
So rather than taking 20-30 yrs, the process would have taken us 8yrs if you count the time we started investing in IP's and 12yrs if you count the time we first bought our PPOR. 20-30 yrs sounds like a life sentence to me! I don't know how others react when they think of the length of time involved!
Lots for us to consider!
Have enjoyed reading everyone's responses.
Regards Jason.
MichaelW said:
I would say that it is one of the best ways to build a foundation of wealth for people just starting out in the wealth creation game.
Along with investing in yourself to develop your career, maximise your JOB income, and possibly start your own business.
I also think that it's best use is with maximum leverage ie. up to 97% LVR with LMI, and not 80% LVR no LMI.
If you're going to do 80% LVR no LMI with a RIP, you may as well drop the LVR to 70% and go for a CIP instead.
Yes, that's how I would see it too.
All i can say to those that have used the last 30 years worth of data, look at bond ylds over the last 30 yrs.
Bond ylds have trended down to the point of 0- 0.5% in the USA.
Now look at the relationship between bond ylds and property prices.
Do you think we will achieve the same 'kick' from reductions in bond ylds for the next 30 yrs?
Bond ylds have trended down to the point of 0- 0.5% in the USA.
Now look at the relationship between bond ylds and property prices.
Do you think we will achieve the same 'kick' from reductions in bond ylds for the next 30 yrs?
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