Hey All
As I'm now starting to progress through my property journey, I thought that I should document my property related goals to keep myself accountable. For all of you experienced Somersofters, I would appreciate your feedback on the feasibility of the below outcomes and strategy involved.
My main reason for investing in property is to ascertain financial freedom, to feel financially secure and to be able to spend more time doing the things I love, be it with friends, family or even by myself.
I?m currently 24 and have set the following goals to achieve by ages 30 and 40.
Age 30: To hold an asset base of at least $4m.
Age 40: Net passive Income of $100k which is roughly $140k pre tax.
I have broken my strategy down into two phases, the residential accumulation phase and commercial accumulation phase which will be used to meet the above goals.
Stage 1 - Residential Accumulation
To hold an asset base of $4m by the time I am 40 I will be looking to purchase 10 properties at approximately $400k each. Targeting the lower quartile of the market allows me to keep yields high to assist with cash flow.
I currently have one investment property worth $350k and after the construction of my second property by my 25th birthday my Assets will be $710k and my loans will be $590k with cash on hand of $45k.
By drawing down on the equity in my 2nd IP and using cash on hand I will be able to purchase two additional IP?s for around $350k each giving me $1.4m of assets with 5 years to reach $4m.
Each year I will be able to save approx $40k, maybe a little less in the early years and more in the later years. From my savings I will be looking to purchase a $400k property each year for 5 years. Total Assets = $1.4m + $2m = 3.4m.
From purchasing well and any increases in value I am aiming to be able to draw down another $100k to be able to purchase additional one or two properties at $400k for total assets of $4.4m at age 30.
Any comments here on my ability to service these 10 / 11 properties in the banks eyes? My income is currently around $70k and should be increasing to about $120k by the time I?m 30. I am aiming to have the properties at least cash flow neutral after any depreciation benefits.
If I have not experienced many capital gains at this point in time I will have approximately $300k in equity with assets of $4m. Quite a high LVR but hey, I'm young and all properties will be purchased with cash flow in mind.
If the properties appreciate at around 5% then equity would be approximately $800k (Assets $4.2m - Loans of $3.4m).
Stage 2 - Commercial Property (Assuming $4.2m Assets and $3.4m Loans)
The second stage of my plan is based around accessing the equity from my residential properties to purchase commercial property with strong yields.
For the purpose of these calculations I have estimated that the residential properties will grow at 5%. Growth may be lower or may be higher, the strategy will have to adjust accordingly.
Assuming 5% growth, at age 32 Assets will be $4.6m and loans $3.4m giving me equity of 1.2m. If I am able to draw to the properties to 90% LVR I can cash out $780k as a deposit on a $1.8m commercial property and use savings for the closing costs.
Commercial Property 1 = $1.8 million with an 8.5% yield.
Cash flow at age 32 based upon interest rates at 6.5% = $36k pa.
Cash flow at age 40 assuming 4% rent increase pa = $92k pa.
Commercial Property 2 = $2.5 million with an 8.5% yield.
At age 35, equity in the residential properties will be enough to cover a $1m deposit + costs for a $2.5m property.
Cash flow at age 35 based upon interest rates at 6.5% = $50k pa.
Cash flow at age 40 based upon 4% rent increase pa = 96k pa.
Age 40 - Statistics
Assuming the above 5% growth in the residential properties and 3% growth in the commercial properties my assets and liabilities would be as follows:
Assets = $12m
Loans = $7.6m
Net Assets = 4.4m or a LVR of 63%
Cash flow from the two commercial properties at age 40 = $188k pa gross.
Reducing this for 3% inflation per year works out to be $120k pa in current dollars and additional rent from the residential premises should cover the remaining $20,000 required for my goal.
At this stage the aim would be to let inflation do its job with the rent increasing by at least 20k per year and even at 3% capital growth, equity of $360,000 per year.
Possible choices at this stage would be to sell a couple of residential properties to reduce any headaches and purchase a few more commercial properties as the loans are paid down.
TLDR : Buy many residential properties to build up a solid asset base and then leverage the equity in these properties to purchase high yielding commercial properties to provide a passive income stream in the future.
Thanks to anyone who managed to read through the whole thing. Any questions or points you would like to make are much appreciated
As I'm now starting to progress through my property journey, I thought that I should document my property related goals to keep myself accountable. For all of you experienced Somersofters, I would appreciate your feedback on the feasibility of the below outcomes and strategy involved.
My main reason for investing in property is to ascertain financial freedom, to feel financially secure and to be able to spend more time doing the things I love, be it with friends, family or even by myself.
I?m currently 24 and have set the following goals to achieve by ages 30 and 40.
Age 30: To hold an asset base of at least $4m.
Age 40: Net passive Income of $100k which is roughly $140k pre tax.
I have broken my strategy down into two phases, the residential accumulation phase and commercial accumulation phase which will be used to meet the above goals.
Stage 1 - Residential Accumulation
To hold an asset base of $4m by the time I am 40 I will be looking to purchase 10 properties at approximately $400k each. Targeting the lower quartile of the market allows me to keep yields high to assist with cash flow.
I currently have one investment property worth $350k and after the construction of my second property by my 25th birthday my Assets will be $710k and my loans will be $590k with cash on hand of $45k.
By drawing down on the equity in my 2nd IP and using cash on hand I will be able to purchase two additional IP?s for around $350k each giving me $1.4m of assets with 5 years to reach $4m.
Each year I will be able to save approx $40k, maybe a little less in the early years and more in the later years. From my savings I will be looking to purchase a $400k property each year for 5 years. Total Assets = $1.4m + $2m = 3.4m.
From purchasing well and any increases in value I am aiming to be able to draw down another $100k to be able to purchase additional one or two properties at $400k for total assets of $4.4m at age 30.
Any comments here on my ability to service these 10 / 11 properties in the banks eyes? My income is currently around $70k and should be increasing to about $120k by the time I?m 30. I am aiming to have the properties at least cash flow neutral after any depreciation benefits.
If I have not experienced many capital gains at this point in time I will have approximately $300k in equity with assets of $4m. Quite a high LVR but hey, I'm young and all properties will be purchased with cash flow in mind.
If the properties appreciate at around 5% then equity would be approximately $800k (Assets $4.2m - Loans of $3.4m).
Stage 2 - Commercial Property (Assuming $4.2m Assets and $3.4m Loans)
The second stage of my plan is based around accessing the equity from my residential properties to purchase commercial property with strong yields.
For the purpose of these calculations I have estimated that the residential properties will grow at 5%. Growth may be lower or may be higher, the strategy will have to adjust accordingly.
Assuming 5% growth, at age 32 Assets will be $4.6m and loans $3.4m giving me equity of 1.2m. If I am able to draw to the properties to 90% LVR I can cash out $780k as a deposit on a $1.8m commercial property and use savings for the closing costs.
Commercial Property 1 = $1.8 million with an 8.5% yield.
Cash flow at age 32 based upon interest rates at 6.5% = $36k pa.
Cash flow at age 40 assuming 4% rent increase pa = $92k pa.
Commercial Property 2 = $2.5 million with an 8.5% yield.
At age 35, equity in the residential properties will be enough to cover a $1m deposit + costs for a $2.5m property.
Cash flow at age 35 based upon interest rates at 6.5% = $50k pa.
Cash flow at age 40 based upon 4% rent increase pa = 96k pa.
Age 40 - Statistics
Assuming the above 5% growth in the residential properties and 3% growth in the commercial properties my assets and liabilities would be as follows:
Assets = $12m
Loans = $7.6m
Net Assets = 4.4m or a LVR of 63%
Cash flow from the two commercial properties at age 40 = $188k pa gross.
Reducing this for 3% inflation per year works out to be $120k pa in current dollars and additional rent from the residential premises should cover the remaining $20,000 required for my goal.
At this stage the aim would be to let inflation do its job with the rent increasing by at least 20k per year and even at 3% capital growth, equity of $360,000 per year.
Possible choices at this stage would be to sell a couple of residential properties to reduce any headaches and purchase a few more commercial properties as the loans are paid down.
TLDR : Buy many residential properties to build up a solid asset base and then leverage the equity in these properties to purchase high yielding commercial properties to provide a passive income stream in the future.
Thanks to anyone who managed to read through the whole thing. Any questions or points you would like to make are much appreciated