Long Term Objective?

[Morgs]

Hi all,

Just got a query for those who are engaged in a 'Buy & Hold' type strategy; or have thoughts on the below.

Currently we're engaged in a strategy like this acquring as many quality properties as we can. We have however just considered that at some stage we are going to have a portfolio of hundreds of properties which has lead to some considerations/thoughts

A) The main one being that I've got no long term objective. At the moment it is all driven through capital growth on the base of each property acquired.

B) We are using interest only loans to maximise cashflow etc - which means no principal is being paid off and these properties are not structured to ever be owned

C) Will need to consider the most appropriate way to minimise CGT if it came to range rationalisation.

Does anyone have anything to discuss / commentary on points A & B?

Certainly we've made a paper profit to date which can't be accessed without paying liable CGT upon liquidation - from here it feels a long way from a solid strategy!

 

[HandyAndy888]

Yeah...read:

http://www.somersoft.com/forums/showthread.php?t=37423

 

[alexlee]

I'd be VERY surprised if you don't figure out how to convert equity into income way before you accumulate 'hundreds' of properties. When you have the money, someone will be around to teach you. Waltz into a private banker's office (not the crappy ones the Big 4 banks assign to anyone with a couple hundred k in loans: the real ones that deal with high net work individuals) and they'll go through it with you.
Alex

 

[asdf]

Currently we're engaged in a strategy like this acquring as many quality properties as we can. We have however just considered that at some stage we are going to have a portfolio of hundreds of properties which has lead to some considerations/thoughts

What have you acquired Morgs?

 

[Dazz]

We have however just considered that at some stage we are going to have a portfolio of hundreds of properties which has lead to some considerations/thoughts

....you might be surprised that as the years tick by, and you grow the portfolio, it might be worth hundreds of properties, but it will rarely actually be hundreds of properties. Not many people go down that track, as the time impost becomes too much.

You might find the properties that attract you later on in your journey might be worth 10x, 20x or even 100x the value of the properties you are looking at right now. So instead of making 100 purchases, you might only need to make 10, 5 or even 1 to have the same effect. Make sense ??

 

[Modal Harmony]

Hello Morgs,

Agree with Daz - 100's of properties it not really necessary to set up for retirement I would think. To answer your queries:

A) No long term objective? Surely financial independence is your objective but the level to which you wish to live (frugally or opulently) will determine how much capital growth you are after.

B) Interest only loans refinanced at appropriate intervals is the way to go. Rule No.1 - get a property savvy mortgage broker.

C) CGT - depends on your status with regards to being married (or otherwise); best arrangement is for highest income earner to take the largest share in their name (eg 90/10) as "Tenants in Common" to gain maximum tax deductions on depreciation. "Joint Tenants" is the 50/50 split and is useful to spread the capital gain. Note these are set up with your solicitor and either arrangement will depend on what CGT legislation is in place by the time you come to sell properties to live off.

Hope this helps!

 

[Nuzdeano]

In getting back to working out your long term objective, I have just read a book titled 'The Number' by Lee Eisenberg which was excellent for helping me to think about my long term objectives.

The first few chapters are quite funny as it highlights how foolish the vast majority of people are in not giving any consideration to their well being in retirement.

In a nutshell, this book suggests:
Step 1: Work out what you want to do with your life from basics such as what your typical day will look like, where you will go on holidays and how often you want to go on holidays and anything else you desire to do, etc
Step 2: Figure out what your expenses will be on this basis
Step 3: Figure out what 'number' / assets will yield your expenses (atleast)

Hope this helps
Dean

 

[steveadl]

Sounds interesting Dean, gonna go see if my book shop has it...

 

[Nuzdeano]

I borrowed it from the local library

 

[steveadl]

hmmmm may have to as well, bookshop doesn't have it.

 

[Morgs]

Hi all

Thanks for the replies!!

Yes - hundred of properties is an egageration.... my concern is that could potentially end up with so many that is becomes difficult to manage

Purchasing just residential properties.

I suppose if I were to rephrase my query is along the lines of how to translate a portfolio of geared properties into income? i.e. thoughts along the lines drawing equity and investing that into managed funds to provide income / Or selling down assets when funds are required. I need to do more reading clearly

 

[oasis1frog]

100s of properties = 100s of tenants (good & bad), 100s of leaking taps, 100s of blocked toilets, 100s of insurance & rates, you get the drift, you still want a life, don't you ?

 

[alexlee]

100s of properties = 100s of tenants (good & bad), 100s of leaking taps, 100s of blocked toilets, 100s of insurance & rates, you get the drift, you still want a life, don't you ?

Just give your PM power to make small repairs without calling you.

In any case, if I had 100s of properties, you can bet I would hire an ex-PM or someone like that to take care of this stuff for me. And you can bet with that many properties I wouldn't have a day job. Even taking care of 100 properties isn't going to take up as much time as my job does now.
Alex

 

[yieldmatters]

Currently we're engaged in a strategy like this acquring as many quality properties as we can. We have however just considered that at some stage we are going to have a portfolio of hundreds of properties which has lead to some considerations/thoughts

I'm not sure how you could get to hundreds of properties unless you have an enormous income to fund them. On interest only lets say it takes 5 years of rent rises to send your property cashflow positive (that is being generous in today's market). Lets say you could only hold no more than 3 negatively geared property at one time due to income constraints. That means you could get 3 every 5 years at the absolutem maximum. So over 20 years that would be 12.

Regarding your thoughts the first rule of a stable financial position is to be diversified. So it's good you are giving it some thought.

 

[BayView]

Long term objective; Look back on the many, many years I have had in retirement, living on the equity and rents from the properties.

Short term objective; setting up the long term objective.


Treat life the way you treat golf;

don't focus on results - just keep working on the plan; keep working on your fundamentals on a regular basis and the results will look after themselves.

 

[alexlee]

I'm not sure how you could get to hundreds of properties unless you have an enormous income to fund them. On interest only lets say it takes 5 years of rent rises to send your property cashflow positive (that is being generous in today's market). Lets say you could only hold no more than 3 negatively geared property at one time due to income constraints. That means you could get 3 every 5 years at the absolutem maximum. So over 20 years that would be 12.

I managed to get 7 in 7 years, and I have a 60% LVR. I can get a LOT more than 12 in 20 years. In fact I'm planning to get to about 12 properties in the next 3 years, so that's 12 over 10 years. They're cheaper than the median, but not that much cheaper.

I started buying when many properties were cashflow neutral or positive from day 1. Those times will come again (after a fall in prices from today's levels and continued rise in rents). If there are houses, say, going for 5% yield now (my friend just bought one at 5% yield in my target area), then a 15% fall in prices over the next 3 years and 7% rental increases for 3 years will give you a yield of about 7.5%. That gets you VERY close to cashflow neutral even at current interest rates of 8%.

Say you buy a $250k property at 7.5% yield. How many could you buy, since you're losing maybe $2k a year on it? Lots. And rents will keep going up. Another 7% increase in rent would be maybe $1k a year after PM fees.

Does a 7.5% yield sound crazy? There were plenty of those in the mid-late 90s.

Meanwhile, the existing rent on your properties are also going up by 7% (actually I'm seeing higher than that for my Brisbane places: just re-rented a townhouse for $330pw, previous rent was $290pw).

As an aside: most people (especially non-investors, which is most of my friends, unfortunately) don't understand how I can afford all my properties NOW. They didn't understand when I had a lot less properties a few years ago, either. When you actually live the numbers, so to speak, you see it. If you don't experience the numbers, it's hard to imagine it.

I don't see myself owning 'hundreds' of individual properties, though. More likely, I'll move to owning blocks of units, land, and build my own duplexes, etc.
Alex

 

[BayView]

I'm not sure how you could get to hundreds of properties unless you have an enormous income to fund them. On interest only lets say it takes 5 years of rent rises to send your property cashflow positive (that is being generous in today's market). Lets say you could only hold no more than 3 negatively geared property at one time due to income constraints. That means you could get 3 every 5 years at the absolutem maximum. So over 20 years that would be 12.

Regarding your thoughts the first rule of a stable financial position is to be diversified. So it's good you are giving it some thought.

Yield,

Have we taught you nothing these last few months?
you are assuming everyone has neg geared investments. It is possible to buy pos cashflowed investments even now. Not easy; but it is do-able. If you can't buy a pos cashflowed investment, or one that is only marginally neg geared, then it's probably not a good time for that person to buy unless they are on very good income with lots of disposable income.

Also; a stable financial position is not to be in a diverified position. That is a position of someone who lives in fear.
Someone who has a few properties and then diversifies into something like a managed fund is not improving their stability. The stock market could crash and then the managed fund is worthless, and so on. Becoming an expert in one field is the way to go, and then you can use your expertise and experience to maximise safety and returns.

I like Warren Buffet's quote: "put all your eggs in one basket and watch that basket very, very carefully".

A stable financial position is basic Year 9 economics to me;
1. more money coming in than going out - total.
2. low LVR - less than 70%.
3. all debt applied to income and cap growth assets.

 

[alexlee]

Positively geared properties were fairly plentiful in the late 90s, and property was not considered a good investment back then. The time will come again when positive geared properties are available in the capitals, and it will likely be at a time when property is NOT a good investment.

So why not wait until then to buy, you say? Because I don't know when the market will change, and you don't, either. So I'll just keep buying. In any case, it's better to enter a down period with a chunk of equity to buy more during the downturn, than to start from scratch in a down market.
Alex

 

[Angelissa]

I think I understand what Morgs is saying..I have a couple of properties that I plan on refinancing as they grow in value to buy more properties, but I can't see their growth funding the lifestyle that I would like to have unless I use the refinanced funds which doesn't seem smart or do you wait till the properties become positive cash flow from rent growth..

 

[ianvestor]

I think I understand what Morgs is saying..I have a couple of properties that I plan on refinancing as they grow in value to buy more properties, but I can't see their growth funding the lifestyle that I would like to have unless I use the refinanced funds which doesn't seem smart or do you wait till the properties become positive cash flow from rent growth..

This is called Living on Equity and many 'smart' people are already doing this.