Manufacturing CF+ Properties

[sash]

Given the current credit environment and other risks, I have been contemplating manufacturing CF+ over time.

Basically my idea goes like this:

1. Target units or houses in cities of at least 100,000 people for less than 200k.....there is still stuff out there even in Sydney & Melbourne.

2. Focus on a minimum yield of 6% plus for houses and 7% plus for units to cover extra strata fees.

3. Look for stuff which require a little cosmetic maintenance to increase the yield further.

4. With current yields the net CF bleed is about 60pw....but with rates dropping down to 7.75% it becomes cashflow positive within 2 year...assuming rates drop another 1% over this time period...any more and it is time to have a party.

5. I am assuming that CG will be only about 5% per annum but rent growth will be 10% per annum.

I look forward to hearing from SS people to find the flaws if any in my way of thinking ....that way I can further tighten and improve my model. Would love to hear if you have used this personally and have had success. I have used a hybrid of this over the years and has worked well....

Cheers
Sash

 

[Aimjoy]

I have used a hybrid of this over the years and has worked well....Cheers Sash

I think you're answered your own Q sash. Why not keep on doing what has worked well?
I know humans want excitement but investing when done correctly is going to be boring. You develop a strategy and repeat over and over - boring! but it makes you rich

 

[boomtown]

Sounds good to me.

 

[sash]

Thanks Aimjoy....just trying to fine tune it...as there are people on SS who might be able to further improve things. Always looking for new ideas...some of my past ideas have come from fellow SSers...

I not stepping from my own game of the boring acquire, rent and forget game. I have also branched out into Share Options in small way and already up 35% on the very small amount is invested.

What strategy are you using at the moment?

I am also noticing the highly geared SSers have gone quiet....but alot of newbies are thinking ahead for the next 5 years....so there is a lot of excitement in the air!

I think you're answered your own Q sash. Why not keep on doing what has worked well?
I know humans want excitement but investing when done correctly is going to be boring. You develop a strategy and repeat over and over - boring! but it makes you rich

 

[roosterfan]

How did you get to the $60 pw? That seems pretty low to me, I would be stoked with that on my Sydney units! What sort of % lend are we talking?

 

[sash]

Well...unnit bought for 168k...currently rented for 230pw...and potential to get 280pw with a small clean-up. Most times I only put 10k or less into the deal plus LMI & stamps.

So lets do the maths:

1. 160k at 8.5% Interest only is about $13,600

2. Other costs (rates, mgmt fees, strata, etc.) is about 3800 pa

3. Rent is about $14,560 per annum

Based on this (interest + other costs) minus rent is about $2840 or about $55pw without any depreciation or tax deductions factored in. With this factored in is it about $1400 pa or $27pw.

Mind you these units are in areas like Bankstown, Auburn....and alot of people have an aversion to going to these suburbs.

How did you get to the $60 pw? That seems pretty low to me, I would be stoked with that on my Sydney units! What sort of % lend are we talking?

 

[Aimjoy]

What strategy are you using at the moment?

I manufacture CF+ properties by increasing the yield - so I only buy houses with granny flats or a house with a big enough backyard / side access / dual street fromtage that allows me to build a g/flat

I also do some options - mostly covered calls - nice volatility atm for good premium.

Cheers,

 

[Player]

Can be done in middle Sydney

Hi sash,

I like it. In order to share and give some support to your theory, this is what I did with our last major purchase. Four pack in Parramatta, all underlet in 2006, now yielding over 6.5 % on purchase price with tax benefits of nearly 2 % of purchase (depreciation given as a percentage to keep quantities consistent and give weight to the model) and locked up at 7.2 % fixed for five. Allowing for expenses it is neutral now.

If I renovated even further then rent would be even better, however very comfortable now and with potential upzoning (fingers crossed) to high density, I intend to flip the lid and put another two doors on top. Even with further loan to do that, it will (by virtue of higher rent and depreciation from new), be well and truly positive cash flow.

Then it will create a (quality) problem.....income tax

 

[Peter Parker]

I look forward to hearing from SS people to find the flaws if any in my way of thinking ....that way I can further tighten and improve my model.

Sash, that model is pretty much what I've adhered to in recent purchases. Capital growth hasn't been great since purchase in 2006/7, but they're long-term holds with zero net outgoings. And I'd love some vacancy to do some improvements, but it hasn't happened yet!

If you can, buy a 1988 house rather than a 1984 house for building depreciation to make the margin even slimmer. But in doing so, try not to pay too high a premium (maybe $10k max) for the newer place or sacrifice too much in location amenity, block size or subdivision potential.

Peter

 

[Aaron Sice]

Then it will create a (quality) problem.....income tax

but you're paying tax on the time someone ELSE has put into working to pay you - not paying tax on you selling YOUR time.

nothing wrong with that at all IMO.

 

[sash]

Aimjoy, Player, & Spiderman...thanks for your comments. Spiderman...like your idea about post 1985 property for depreciation!

Bluecard,

Agree with you...fabulous concept isn't...I think it is called PASSIVE INCOME...you get paid while you sleep, read the newspaper, or travel. This is exactly what I targeting! Apply depreciation allowances and you can say earn 80k but only pay say 10k tax....which is equivalent to earning almost 100k.

but you're paying tax on the time someone ELSE has put into working to pay you - not paying tax on you selling YOUR time.

nothing wrong with that at all IMO.

 

[Peter Parker]

Aimjoy, Player, & Spiderman...thanks for your comments. Spiderman...like your idea about post 1985 property for depreciation!

Though '85 is pretty much useless as it only has a couple of years left - really needs to be post september(?) 87 now.

Peter

 

[MissHoney]

Given the current credit environment and other risks, I have been contemplating manufacturing CF+ over time.

Sash

Sash, I have the same thing in mind but these kinds of properties seem hard to find in large cities...or perhaps we are terrible negotiators (perhaps that's another topic...).

I'm not sure if this is bad forum ettiquette but I have a scenario in line with this theme to run past you and other interested SS investors.

Anyway, here goes...note it fails to meet your specific criteria (especially the bit about being in a city of 100,000) but seems likely to be a CF+ opportunity.

The property is for sale for 300K (maybe a bit less if pushed, but the RE agent is a fairly tough cookie and I happened to go to school with him)
The main house is a 3 bedroom family home (seemingly good condition from outside). There are also 2 x 2 bedroom brick veneer units in good condition (built 80s). The whole thing presently gets 400 per week.

Would you consider this is a good deal given that CF+ properties are the safest bet in the current climate?

 

[lizzie]

I manufacture CF+ properties by increasing the yield - so I only buy houses with granny flats or a house with a big enough backyard / side access / dual street fromtage that allows me to build a g/flat

this is the option i'm looking at this week - after crossing off a few other options on the search for little initial cost, with room to improve gains and orgainising from a distance (whyalla is near nowhere!).

 

[Player]

but you're paying tax on the time someone ELSE has put into working to pay you - not paying tax on you selling YOUR time.

nothing wrong with that at all IMO.

Exactly BC! Nothing at all wrong with that. I called it income because in the eyes of the ATO it is. The mode of earning it is what I like best.

As sash said......... money while you sleep

 

[Aimjoy]

this is the option i'm looking at this week

Lizzie, I must say it does make it very easy to go house hunting. Once you explain to the REA what you want they often have zero or one only property that fits the criteria.
A keyword search on domain.com.au used to work (but I think they've taken it off) so I'd use keywords like dual, granny, in-law accommodation, studio, teenage retreat, etc and only get maybe one e-mail per week or fortnight. I also look for the above that needs a reno too - so that's even more refining on the criteria, along with a waterview, cafe, transport, school etc as normal.
Anyways all the best with the search

(whyalla is near nowhere!).

When are you coming back to civilization?

 

[vbplease]

I manufacture CF+ properties by increasing the yield - so I only buy houses with granny flats or a house with a big enough backyard / side access / dual street fromtage that allows me to build a g/flat

Hi Aimjoy,

I'm interested how you draw up the leases for your properties - do you have two seperate leases? Say a family in the house and a couple or single person in the granny flat? Do you find most people are happy renting with this arrangement? Thanks

 

[Aimjoy]

Hi Aimjoy,

I'm interested how you draw up the leases for your properties - do you have two seperate leases? Say a family in the house and a couple or single person in the granny flat? Do you find most people are happy renting with this arrangement? Thanks

Hi vb,

See this link where it was discussed at length:
http://www.somersoft.com/forums/showthread.php?t=36900

Cheers

 

[vbplease]

Thanks Aimjoy!

 

[lizzie]

When are you coming back to civilization?

i'm just internet browsing at the moment for the dual, or potential dual.

yes - starting to feel like i really really don't fit in a small blue collar uncultured town ... but anyhow ... was supposed to be 6mths (remember i laughed at hubby when he was adament) - now it looks like could be 12-18mths.

unless nz steel start their new project (coal mine sold last month to raise funds). then we'll be off there.