My Strategy -The next 20 years

My Strategy ? Feedback appreciated!

Basic fundamentals:

Year 1 ? 15: Buy as many high growth properties as possible. Aiming for around 7-10 in capital cities. Never cross-collateralize & Fund negative equity shortfall by LOC to maximize tax advantage.

Year 15-25: portfolio will be self-funding by now. Hold properties to capitalize on CG.

Year 25 and beyond: Begin selling off properties to reduce debt and purchase some high-yielding properties (e.g. commercial premises)

Assumptions used in my calculations:
1) Yield of 4% (about average for Australia)
2) Interest rate of 7.00%
3) Never paying off any debt
4) Property growth of 7.00% p.a. (being conservative here ? average is around 8.90% p.a.)
5) Inflation ? 3.00%
6) Purchase price of investments is based on starting at $400k, then $500k, then $600k and so on every 2 years.
7) No PPOR for next 10 years

Based on the above assumptions my model predicts:

1) In 15 years portfolio net worth will be approx. $2.4mil (in todays $$$) & have neg. equity component of $55k p.a.

2) In 20 years portfolio net worth will be approx. $3.8mil (in today?s $$$) and be producing surplus rent of approx. $100k p.a.

The maximum amount of negative equity I will have to fund is $60k and will be in approx. 10 years? time.

Note this whole model has been done on excel using correct formulas so the numbers are correct and also discounted back to account for inflation.

I?m looking for commentary or critiques on this model I have created. Any advice or criticisms is much appreciated 

I understand there are so many variables which pop up along the way but this is my basic strategy.

Coming up with a strategy is not hard. You don't need to be smart to do it. Even the most rudimentary buy and hold strategies are easy to conceive.

The question is, how do you survive between now and then? That's all it really comes down to. With a 4% yield, I suspect you haven't really thought about this part of it...
Great plan and well detailed IMO - but i'm not an expert on forming investment strategies and there's probably a few more considerations to make as you start moving to the micro parts of your plan.

Have you thought about how you're going to finance that based on your assumptions. Not crossing is one thing, but its only a small (and obvious) step to take. Managing your serviceability will be very important going forward too.

For example, if your taking a 7% interest rate assumption for borrowing power calculations and a 4% yield, than its quite likely you're going to hit a serviceability wall reasonably quickly. Funding that sort of gap for a multi-million dollar portfolio will require a very large income to hold the portfolio.

On top of that, there may be limitations from a cash flow/day to day perspective with those yields. Purchasing 10 growth assets during accumulation phase is great, but it may be difficult to keep purchasing if yields aren't meeting repayments/expenses.

Realistically, in current market conditions, the above statement is not true as rates are much lower and effective structuring of your loans/switching lenders at the right times will likely get you to a large portfolio. But over time and taking your assumptions in serviceability calculators and its likely to hurt over time.

Good luck!

also need to consider with such a long hold time that those properties are going to require a major renovation at some point too.
Over the given time frame I think this is very achievable. If you're really dedicated it's possibly even conservative.

You will hit serviceability problems at various points but time, inflation and fluctuating interest rates work in your favour. There'll also be opportunities to become creative along the way which can help.

I'd suggest to go as hard as you can initially. You will get to a road block, either in equity or affordability, but this will disappear given time. You've then got another opportunity to pick up a few more before you have to wait again.

Property investing doesn't have to be rocket science or risky if you get started early and have plenty of time to get to where you want to go.
Good work on the time and planning on your strategy!
You have some solid fundamentals going on here! Top Stuff..

A couple of points;

1. Redom raised this, servicing for bank purposes on 4% yield properties being assessed at 7% minimum for bank purposes. Im not sure what your personal circumstances are, but you may encounter servicing issues along the way.

2. Given median prices of capital cities, how do you intend to fund deposits on 7-10 properties? Will be borrowing for additional deposits you are effectively borrowing 100% for a number of properties, so your servicing gets put under further pressure. LMI to factor into this also.

Some investors purchase property one, sit on it for a while, then come back to investing some years later and have built equity up over that time, allowing them to fund multiple deposits and purchases in quick succession.

If you don't have the privilege of such equity, or a large deposit cash base, or a significant income, you may need to consider rental yield if trying to build a portfolio of that size.

Im interested in your journey. Best of luck
Great Start and nice strategy in general, but what is it you are trying to achieve?

Couple of random points
1. Growth of 7% pa might be a bit high, we are at or near the peak of the market (in Sydney). There could then be prolonged flat period. Also statistics don?t consider that part of the growth in values is due to improvements to property. Stress test your strategy at say 5% and 3% growth.
2. Considered land tax? This can hurt, but if you spread properties out you could probably get 20 or so without incurring any
3. No PPOR??? The PPOR is the only major asset that is potentially tax free. Why not consider moving into one of them, and maybe later rent it get all the benefits yet keep it CGT free (s188-145).
After a certain point it may also be better to sell. Perhaps you could sell the PPOR tax free and use the proceeds to put into the offset on one of the IPs and then live in that (or pay it off).

Some index funds return say 6% pa in dividends. No land tax, no costs such as management fees, no repairs and no hassles so selling a property or 2 strategically, reducing CGT as much as possible and investing the proceeds in a good EFT (perhaps thru super) will give a higher yield, better tax position from franking credits etc. You may not do this from the beginning because it is more risky to leverage, but later when borrowing capacity is tight and there is heaps of equity it may work well.

Also seek tax advice on borrowing to fund any shortfalls ? capitalizing interest essentially.
The biggest variable which is hard to predict is future growth, I would suggest that you are not being conservative at all but very optimistic. That would mean the properties would double every 9years, possible but unlikely moving forward.
The rest looks reasonable, hopefully rates will be lower and you might make some purchases at the right time with a much higher yield.
I would consider your strategy as aggressive and believe you need to stress test it for lower cg returns.

Keep us posted on your progress.
Thanks for the feedback guys, much appreciated.

My exact goals are:
1) Portfolio Net worth of $4-5mil by age 45 (21 years? time) consisting of 7-10 mature (held at least 5 years) high-growth properties
2) Maximized tax advantage (this is important for me as I will have high income)

Addressing the points mentioned:

 Serviceability ? I intend to spend every bit of spare cash funding this portfolio in the early stages. My income isn?t considerable right now (only 24) but it will be soon (nothing is guaranteed but I have high aspirations). If I do hit a serviceability wall then so be it, I will have to reassess when that time comes. There are so many options available here e.g. (create dual income properties, sell off and pay down debt, joint-ventures etc ? as peter said I will have to be ?creative?).

 Yield - Although I based the assumptions on 4% yield and IR of 7.00% this is extremely loose and the worst case scenario (for example, I bought my first property in Taringa, QLD in Dec-2014 which I believe is a high-growth property and it is CF-Neutral). So essentially, out of the 10 properties this model is based on I already have 1 which has not affected serviceability. Not saying this can happen every time but It can happen.

 PPOR ? Apologies as I wasn?t clear on this. When I said ?No PPOR? I meant in the model itself. I am not opposed to buying a PPOR in net next 10 years or so, however It will be over and above my investment portfolio and something I?m not thinking of right now (still live at home and will do for a few more years at least). I did not include it in the model because life takes you down many roads and starting a family and buying PPOR is something that isn?t in my sights just yet. When I do buy a PPOR/move into an IP I will be sure to seek tax advice as to how I can maximize the tax advantages if/when I choose to sell it.

 Deposits for properties ? I save $20k each financial year. If I?m buying a property on average every 2 years that?s $40k deposit which is more than enough (from my experience 95% funding is very common these days). LMI is tax deductible which is a bonus.

 Land tax ? this is something I haven?t even thought and will need to look into it. Thanks for noting it.

I think it?s time for me to start looking for some quality contacts on the tax & loan-structure/lending sides of things. From what I?ve read getting proper guidance earlier on in these areas is paramount to success.
95% LVR is actually very rare these days. I am a broker and can't say I have written any 95% loans in the last year, maybe last 2 years. I expect these to get more difficult to qualify for too. You should probably model on 90%
Strategy is good but it should only be used as a guideline,

especially those value projections, if the values tripe or 50% in the period you specify then your strategy is null and void,

id suggest you have some goals and use the strategy as a guideline and as a monitor of how realistic and successful you have been

good luck!
1) In 15 years portfolio net worth will be approx. $2.4mil (in todays $$$) & have neg. equity component of $55k p.a.


The maximum amount of negative equity I will have to fund is $60k and will be in approx. 10 years? time.

Equity or Cashflow?

Sounds like you are planning to carry massive negative cashflow :eek:
Have you done the numbers on other investment vehicles with that cash injection?

IMO 7% CG sounds optimistic. Not saying it can't be done but I wouldn't be adapting a strategy that needed 7% to be viable.

I do like that you are thinking long term. I just think there may be away to get similar results without locking in such a large cashflow drain.
I am feeling depressed due to the years stated to achieve this, maybe I am expecting too much, I really don't know

You bought the unit in Rokeby Terrace, Taringa? If so, nice fully renovated unit and $450 pw rent is good.

Like others have said serviceability will be a big factor after 3-5 properties.

If you bought $2m of property in the next few years at the start of a real estate recovery period (upswing), then assuming property doubles every 10 years, you would have $4m in property, after 20 years (your end goal post almost), then $8m - less original $2m in loans = $6m.

However to go out and finance $2m in IPs over the next 3 years would be a challenge unless you're on a high income; circa $200k/year and buying near CF neutral IPs each time.
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