jmillar's Strategy - Your Thoughts?

[jmillar]

I?ve spent the weekend reading Dale GG?s ?Trust Magic? and assessing various options so I could make a long term strategy so I have better direction moving forward. The goal posts will almost surely be moved a number of times but I just wanted to do some rough future planning to see if I?m on the right track. This is what I?ve come up with so far? let me know if you have any positive or negative feedback, any suggestions on how to improve, things I haven?t considered etc etc.

The Plan
Step 1: Purchase 10 properties by 2018 (age 26) (average value say $250k)
The consensus is that properties double in value every 7-10 years but let?s say it takes 15 years (5% pa compounded). By 2043 (age 41) the 10 properties will be worth say $5M. Let?s say they?re all bought at 90% LVR and IO so debt is $2.25M. This leaves $2.75M equity. The properties will be neutral/positive when purchased so by 2043 they will all be highly positive and will have brought in income during this period, which will sit in offset.
Step 2: Revalue all properties. Let?s say I can access 80% equity ($4,000,000 - existing $2,250,000 debt) this gives me $1.75M equity to play with.
Step 3: Purchase $1.75M commercial property with equity (no mortgage over commercial properties). Assuming 7.5% net yield, this is $131,250 per annum income.

Notes:
- Letting the properties sit there for 15 years seems like under-utilisation of equity during this period but I used this for simple calculations and as a worst-case. In reality I would most likely keep recycling equity during this period.
- Instead of purchasing commercial property I may wish to use that equity for developments, purchase a business etc but let?s use CIPs as a worst-case, low risk, passive strategy.

Purchasing Structure
At the moment it looks as though the detriments of trusts outweigh the benefits for me (will restrict borrowing capacity, setup costs will tie up capital, no LT threshold in NSW). So my next purchase in QLD will be in my personal name, and my subsequent purchases in NSW will be in my personal name until I reach the LT threshold. Once I reach the LT threshold and my circumstances change I?ll reassess.

I am currently single and on low-moderate income. But in the next 1-2 years my income will be over $100k pa and my marital status may change in the near future, so I see the value of trusts down the track. Also I like the idea of the asset protection provided by certain trust structures and thus I will likely use them down the track.

If my income reaches more than $100k and my marital status changes, having properties in my personal name may not be the best structure. In order to counter-act this, my strategy would be to keep the LVRs on the IPs in my personal name as high as possible (to minimise income of these properties and increase income of trust properties). Also, funds would be kept in offset accounts against the trust properties rather than the IPs held in my personal name (again, to minimise profits of these properties so the properties in trust can have greater income which may be distributed in a more effective way).

Question:
- Under step 2, I?ve put down that I can access say 80%. Since the purpose would be to purchase commercial property, would I be able to reval my resi IPs to 80% or would it have to be less?


Thoughts? Opinions? Feedback?


Many thanks.

John

 

[D.T.]

Good on you for having a strategy when so many don't.

 

[Rolf Latham]

Reveal of resi security can be to 80 or even 90 for commercial ip purchases.

Comm security itself sweet spot is 65 to 70

Ta

Rolf

 

[thatbum]

Quite a detailed strategy - seems fine to me. How much focus have you put into the implementation? i.e. Finding those properties that are neutral/positive geared around $250k with good growth prospects?

Your strategy seems to rely a lot on growth, so how confident are you of being able to find the properties with that growth?

 

[DaveM]

The Plan
Step 1: Purchase 10 properties by 2018 (age 26) (average value say $250k)
The consensus is that properties double in value every 7-10 years

Dont base your entire plan off "property doubles every 7-10 years" clap trap. It is not a hard and fast rule that applies without fail to every single property in Australia.

What if it doesnt double every 7-10 years, or misses one cycle? How does that affect your plan?

The days of "buy anything anywhere and watch it go up 10% every year" are behind us for the moment. Strategies need to incorporate more than "buy houses and watch them double every 7-10 years".

 

[Propertunity]

.....The consensus is that properties double in value every 7-10 years ....

No, the quote is that "on average, the average property doubles in value every 7-10 years". Some properties triple or quadruple over that time.

The problem is that you can't buy an "average" property, you can only buy a particular property.

.....Purchase 10 properties by 2018 (age 26) (average value say $250k) ....

At an average value of $250K you are not going to be even buying an average house. I think this needs to be more like $350-400K minimum.

BUT, good on you for having a plan. Be flexible to readjust it as you go along.

 

[Propertunity]

....The days of "buy anything anywhere and watch it go up 10% every year" are behind us for the moment.

Dave, I don't think these days were ever "with us". It has always come down to careful selection on a huge numbe rof criteria and even the so-called experts only have an 80% success rate at best.

 

[bez23]

Good work for sitting down on a weekend to set your investment goals. With your income, 10 by 2018 should be easily achievable.

The consensus is that properties double in value every 7-10 years but let?s say it takes 15 years (5% pa compounded). By 2043 (age 41) the 10 properties will be worth say $5M.

I don't understand why others bash on you using the 7-10 year rule when you are using 15 years to double (hopefully it should double in 15 years!). Anyways he is young and even if it takes 20 years (unlikely to happen) he will still achieve his goals.

Step 3: Purchase $1.75M commercial property with equity (no mortgage over commercial properties). Assuming 7.5% net yield, this is $131,250 per annum income.

Jmillar, you do realize that money from equity is "borrowed" as well ( means there will be a loan on the commercial property but it's just not used as as security.

 

[see_change]

Dont base your entire plan off "property doubles every 7-10 years" clap trap. It is not a hard and fast rule that applies without fail to every single property in Australia.

What if it doesnt double every 7-10 years, or misses one cycle? How does that affect your plan?

The days of "buy anything anywhere and watch it go up 10% every year" are behind us for the moment. Strategies need to incorporate more than "buy houses and watch them double every 7-10 years".

Agree with this , my experience is it can take longer. We've had two PPOR's go sideways for 6-8 years , after 1988 and until around six months ago in sydney .

So your fifteen year position is a good idea.

I think main cities and large regionals are more consistent.

Be aware , most of the growth occures in relatively short periods with longer flat periods . Banking lending practices vary over time so you need to be aware of that. At times they will give money to anyone while at other times it's really hard to get money out of them..

We've never written a plan as such , though according to all the experts it's important ( personally I don't pay too much attention to experts . I listen, then make up my own mind . Sometimes I'll agree with aspects of what they say , but disagree strongly on other aspects of their ideas.

My advice is listen and then make up your own mind . You want to get to the point where YOU KNOW what is right for you . What works for me might not suit you . Once I joined this forum it took us many months while we worked out what we were going to do .

Be careful of fully trusting people's ( forumites ) advise on specific places to buy . I know I've been given deliberately wrong advice by people who didn't want competition in a specific market ( fair enough ) . If I'm looking to buy in a specific market and someone's asks about it , I mutter a few curses and say nothing .. But once I've bought I'm happy to give advice ...... and post links .
I've had comments made to me about my current tendency to link to any articles supporting Brisbane since late last year .... but I haven't done it once that market has moved significantly .


Cliff

 

[DaveM]

I don't understand why others bash on you using the 7-10 year rule when you are using 15 years to double (hopefully it should double in 15 years!). Anyways he is young and even if it takes 20 years (unlikely to happen) he will still achieve his goals

Nobody is bashing anybody. Its the fact that so many people use the "property doubles every 7-10 years" in planning and it comes undone. jmillar has recognised this and used 15 which is more realistic, and its great that he has done this all on his own!

 

[jmillar]

Thanks everyone for the quick responses and encouragement as usual. This strategy certainly isn't set in stone

Good on you for having a strategy when so many don't.

Cheers, appreciate it.

Reveal of resi security can be to 80 or even 90 for commercial ip purchases.

Comm security itself sweet spot is 65 to 70

Ta

Rolf

Nice one, thanks Rolf.

Quite a detailed strategy - seems fine to me. How much focus have you put into the implementation? i.e. Finding those properties that are neutral/positive geared around $250k with good growth prospects?

Your strategy seems to rely a lot on growth, so how confident are you of being able to find the properties with that growth?

I spend a fair bit of time researching the trends in each area and looking at what is happening, which will help me capitalise on short-term growth to help me continue to acquire property. ie I saw what the market was doing which is why I bought my first 2 IPs in such a short timeframe. In 4-5 months I've seen properties in the same blocks as mine sell for 15+ % more. It's now time to pull out equity and buy more.

Long term growth is also a primary concern which is why I will only buy metro properties, not properties in volatile markets.

When you say my property relies a lot on growth - would you suggest I have it rely partially on something else? I wouldn't mind buying properties with reno potential down the track so I can create my own growth, and buying large blocks with future development approval.. but they would have to be neutral/positive from Day One..

Dont base your entire plan off "property doubles every 7-10 years" clap trap. It is not a hard and fast rule that applies without fail to every single property in Australia.

What if it doesnt double every 7-10 years, or misses one cycle? How does that affect your plan?

The days of "buy anything anywhere and watch it go up 10% every year" are behind us for the moment. Strategies need to incorporate more than "buy houses and watch them double every 7-10 years".

Hi Dave. I based it on 15 years to be relatively safe, but point taken. There isn't a great deal I can do if the market doesn't increase as much as I hope - nor can any other investor I suppose.

Perhaps buying properties with reno/development potential could allow me to create my own growth?

No, the quote is that "on average, the average property doubles in value every 7-10 years". Some properties triple or quadruple over that time.

The problem is that you can't buy an "average" property, you can only buy a particular property.

At an average value of $250K you are not going to be even buying an average house. I think this needs to be more like $350-400K minimum.

BUT, good on you for having a plan. Be flexible to readjust it as you go along.

Thanks mate, I'm sure it will be adjusted many times in the near future!

You're right, $250k is on the lower end. I suppose I kept it low so my numbers were conservative... Some may be significantly more while others may be less. Each property will be judged on its own merits and how it allows me to achieve my short term goals while keeping my long term goals in mind as well.

 

[jmillar]

Good work for sitting down on a weekend to set your investment goals. With your income, 10 by 2018 should be easily achievable.

I don't understand why others bash on you using the 7-10 year rule when you are using 15 years to double (hopefully it should double in 15 years!). Anyways he is young and even if it takes 20 years (unlikely to happen) he will still achieve his goals.

Jmillar, you do realize that money from equity is "borrowed" as well ( means there will be a loan on the commercial property but it's just not used as as security.

Thanks mate.

Errr my plan was to draw the equity out of the resi property (ie increase debt from $2.25M to 4M) so the repayments on the resi properties would increase (although one would expect that the rental increase over this period would more or less cover the new repayments). The equity drawn out would then be used to purchase the CIP without having to lend against the CIP.

Am I right here, guys?

Agree with this , my experience is it can take longer. We've had two PPOR's go sideways for 6-8 years , after 1988 and until around six months ago in sydney .

So your fifteen year position is a good idea.

I think main cities and large regionals are more consistent.

Be aware , most of the growth occures in relatively short periods with longer flat periods . Banking lending practices vary over time so you need to be aware of that. At times they will give money to anyone while at other times it's really hard to get money out of them..

We've never written a plan as such , though according to all the experts it's important ( personally I don't pay too much attention to experts . I listen, then make up my own mind . Sometimes I'll agree with aspects of what they say , but disagree strongly on other aspects of their ideas.

My advice is listen and then make up your own mind . You want to get to the point where YOU KNOW what is right for you . What works for me might not suit you . Once I joined this forum it took us many months while we worked out what we were going to do .

Be careful of fully trusting people's ( forumites ) advise on specific places to buy . I know I've been given deliberately wrong advice by people who didn't want competition in a specific market ( fair enough ) . If I'm looking to buy in a specific market and someone's asks about it , I mutter a few curses and say nothing .. But once I've bought I'm happy to give advice ...... and post links .
I've had comments made to me about my current tendency to link to any articles supporting Brisbane since late last year .... but I haven't done it once that market has moved significantly .


Cliff

Thanks Cliff.

I'm exactly like you - I usually listen to all advice but then make up my own mind and never write down plans or goals. But my investing career is something I take seriously and I don't want to just blindly run without being 100% sure I'm on the right track.

Now that I know I am, I can continue to run in that general direction but of course vary my course where necessary

Nobody is bashing anybody. Its the fact that so many people use the "property doubles every 7-10 years" in planning and it comes undone. jmillar has recognised this and used 15 which is more realistic, and its great that he has done this all on his own!

Thanks Dave.

 

[jingo]

Errr my plan was to draw the equity out of the resi property (ie increase debt from $2.25M to 4M) so the repayments on the resi properties would increase (although one would expect that the rental increase over this period would more or less cover the new repayments). The equity drawn out would then be used to purchase the CIP without having to lend against the CIP.

Am I right here, guys?

Yes, this will work. You are essentially using your residential equity to purchase a com property. The advantages of this are that you will pay lower interest rates (ie resi rates as opposed to com rates) and if you don't use the com property as security you will be able to keep this as an unencumbered title. This is one prop I would place in a trust (possibly a family trust) as it will be positively geared. Your overall plan looks good and congratulations on buying your first 2 IPs at such a young age. You may also like to consider investing in direct shares - may be possible to put those in a trust as they will be positively geared. If you start early with a share strategy you will build up a strong income stream via dividends.

 

[jackbak]

Love it!
Great work jmillar, keep aiming high and you'll get there.

 

[IFBB]

Just remember things like lending criteria, stamp duty, LMI, deposits and stuff all come into account. Banks arent throwing money around like they were 4-5 years ago, so maybe the time frame may need to be extended, or perhaps drop the number of properties?

Good work on having a plan though, if it works for you youll be a very happy camper

 

[Richard Feynman]

What's your current income and current cash savings? You have a pretty sound plan in place, so I'm wondering when you'll get the ball rolling. You might be able to grab your first (and maybe even second) IP before your big salary increase.

I'd be looking at purchases closer to $500k. $250k is extremely limiting and with an anticipated income of $100k, there's no need to buy so low unless you're very conservative and want to double your holdings to spread risk.

 

[sash]

A couple of comments:

1. Have you calculated the cost of keeping properties in a trust and the ease of financing properties under this sort of structure?

2. You mention that you would like to buy 10 properties...with a 100k income ...this is possible but you will need to have good capital growth or reasonable equity. The other option is to use 5 and 10% deposits....but just spread them between Genworth and QBE LMI.

3. Your $250k limit...maybe an issue in Sydney. You can still find some buys in Wollongong, Central Coast, and Newcastle. You will definitely find something in Adelaide, Brissie and Melbourne.

4. Do your own research...in the current market I don't think buyers agents are going to be any better....other than relieve you of 10k+

I?ve spent the weekend reading Dale GG?s ?Trust Magic? and assessing various options so I could make a long term strategy so I have better direction moving forward. The goal posts will almost surely be moved a number of times but I just wanted to do some rough future planning to see if I?m on the right track. This is what I?ve come up with so far? let me know if you have any positive or negative feedback, any suggestions on how to improve, things I haven?t considered etc etc.

The Plan
Step 1: Purchase 10 properties by 2018 (age 26) (average value say $250k)
The consensus is that properties double in value every 7-10 years but let?s say it takes 15 years (5% pa compounded). By 2043 (age 41) the 10 properties will be worth say $5M. Let?s say they?re all bought at 90% LVR and IO so debt is $2.25M. This leaves $2.75M equity. The properties will be neutral/positive when purchased so by 2043 they will all be highly positive and will have brought in income during this period, which will sit in offset.
Step 2: Revalue all properties. Let?s say I can access 80% equity ($4,000,000 - existing $2,250,000 debt) this gives me $1.75M equity to play with.
Step 3: Purchase $1.75M commercial property with equity (no mortgage over commercial properties). Assuming 7.5% net yield, this is $131,250 per annum income.

Notes:
- Letting the properties sit there for 15 years seems like under-utilisation of equity during this period but I used this for simple calculations and as a worst-case. In reality I would most likely keep recycling equity during this period.
- Instead of purchasing commercial property I may wish to use that equity for developments, purchase a business etc but let?s use CIPs as a worst-case, low risk, passive strategy.

Purchasing Structure
At the moment it looks as though the detriments of trusts outweigh the benefits for me (will restrict borrowing capacity, setup costs will tie up capital, no LT threshold in NSW). So my next purchase in QLD will be in my personal name, and my subsequent purchases in NSW will be in my personal name until I reach the LT threshold. Once I reach the LT threshold and my circumstances change I?ll reassess.

I am currently single and on low-moderate income. But in the next 1-2 years my income will be over $100k pa and my marital status may change in the near future, so I see the value of trusts down the track. Also I like the idea of the asset protection provided by certain trust structures and thus I will likely use them down the track.

If my income reaches more than $100k and my marital status changes, having properties in my personal name may not be the best structure. In order to counter-act this, my strategy would be to keep the LVRs on the IPs in my personal name as high as possible (to minimise income of these properties and increase income of trust properties). Also, funds would be kept in offset accounts against the trust properties rather than the IPs held in my personal name (again, to minimise profits of these properties so the properties in trust can have greater income which may be distributed in a more effective way).

Question:
- Under step 2, I?ve put down that I can access say 80%. Since the purpose would be to purchase commercial property, would I be able to reval my resi IPs to 80% or would it have to be less?


Thoughts? Opinions? Feedback?


Many thanks.

John