Next step advice please

[Of The Vultures]

I think I've gotten as far as I can go on my own. In the interest of not stuffing up the rest of my investing career, I am in need of advice and lots of it!

Situation so far: Own PPOR in Perth with mortgage, plus 2 IP's in Rocky and one with a family member in Sydney. None of our properties are cross collaterised. LOC's against PPOR were used to fund deposits for IP's.

The Sydney IP pays for itself although it constrains my borrowing capacity due to the shared loan.

Servicing ability is good, although we're moving from Perth to Tassie shortly and will lose my partners income for a while. The PPOR in Perth will be converted to IP and we will rent in Tassie.

I need help with regard to fine tuning my strategy. What I want is to be able to stop work within 5 years. By this I mean I want to generate enough cash from my active investing to provide a minimum of $100k pa. Renovating and selling to start, perhaps moving into development later when I've built up enough capital. Yes, I realise this won't be easy but I'm willing to do the hard yards.

Passive income is something I'd like to achieve within 10 years. To that effect I want to concentrate on acquiring lower priced properties (sub $350k) to which I can add value by renovating and/or subdivision etc so looking at major regional towns, outer western Sydney, inner Perth units etc. Not averse to some mining town exposure eg Emerald QLD for the cashflow. Looking to pay the loans off, willing to eventually sell some property to achieve that.

I don't want a negatively geared portfolio overall as that would tie me to a job. Not keen on withdrawing equity to fund lifestyle either.

I have about $150k LOC still available and don't want to get to a point where I'm denied finance too soon.

I am yet to assemble a decent team (broker, property accountant, solicitor, any others?). Also need to arrange all the appropriate insurances (TPD, life, IP). I need to sort out my structuring but unsure who to speak to about that - saw somewhere on the forum not to rely on brokers for this, so who do I need? Any recommendations?

Willing to travel for right team so even though I'll be in Tassie, if anyone has recommendations from Perth, Melbourne or Sydney, I'm all ears, as I'll be frequently traveling to all three cities.

Sorry for the rambling post, hope someone can help as I'm finding myself a bit stuck and unsure of what my next step should be.

Now off to set up an offset account. Can't believe I haven't done this already.

Cheers

 

[Peter_Tersteeg]

Your structure so far looks fine, but you're right - the offset account is probably something you should have done sooner

Don't get too stressed about joint ownership of a property or two with other parties. Whilst quite a few lenders still assign full liabiltiy with only partial ownership of the income, quite a few are becoming 'enlightened' and will recognise either part income and part liability, or they'll assume full income alongside full liability. These days it is becomeing an easier problem to work with.

Your broker and accountant don't have to be location specific, but conveyancing is a state-by-state deal. Whilst you do need good legal repersentation, conveyancing tends to be more transactional in nature rather than strategic, so it's not particularly important to work consistantly with the same individual for every deal. Most clients with multi location portfolios tend to have a person in each state, but they use the same broker and accountant (and financial planner where warranted).

The lower end of the market (sub $350k purchase prices) are more likely to generate better cashflow for your overall strategy. Keep in mind however, that it takes a lot of properties generating $100 per month to earn a $100k pa income. It's certainly acheiveable, but not as easy as some would have you believe. It may be prudent to also consider capital growth strategies for the odd property here and there. This might tie in well with a renovation or development strategy.

On the subject of renovation or development strategies, they also have their challenges. As you've noted, they're active strategies which require a lot of effort on your part. They can also be very market driven. Many of the Melbourne based renovators at the moment are saying that they'll simply need to purchase, renovate and hold until the market shows further improvements. There's obviously opportunities elsewhere, but this type of strategy is more challenging if it's not in your own backyard.

Additionally, it's not something where you can do 2 deals and quite your day job. You do need to build a decent track record and treat it as a serious business. The objective is to build a continuous income which the banks will recognise as a business income. The challenge here is that this can be very difficult depending on what markets you're working in, as expectations of returns can vary, especially in (generally) depressed markets.

An outright development strategy tends to work better in the higher end of the markets. Consider that you can purchase a block of land in various rural locations for $50k. To build a shinny new awsome house, the cost might be $250k so the total cost to buy the land and build is $300k. The problem is that in many cases, existing house in the same street are selling for $250k (and you've just lost $50k). The same scaling tends to work with low end units and sub-divisions. The end result is worth little more than the cost of the total transaction.

Fortunately this type of development tends to work better in the higher end of the market. The houses might still cost $250k to build, but if the building value is a very small component of the total value of properties in the area, then there's likely to be more profit in the deal.

What it all comes down to is the right strategy will depend on the market sectors in which you intend to implement them, and the resources you've got available to get into that market sector. I should probably take more time to put my rambilings onto paper more coherantly at some point

 

[AAA]

Hi PT Bear, great reply.

Esp the part abt the developments in low value areas not adding up to much profit. In addition to targetting suburbs where the land value is higher, I guess the other option is to try developments with 3+ units. That way you can book some profit from the 3rd onwards.
And the other option I can think of is to sell with permits and let someone else take the risk and you can bank some profits

 

[Peter_Tersteeg]

Thanks for the response AAA. It took me about an hour to write the post as the phone rang about halfway through with an enquiry about reno and development strategies. Karma is the weirdest thing.

We spent 45 minutes going through different scenarios at different price points. I'll spend some time thinking this through more logically and post my thoughts at some point which hopefully will be a bit more structured.

 

[Of The Vultures]

Thank you very much for your reply, especially now that I've just read how long it took you to write it Much food for thought there... So who would you suggest I need to see first: a financial planner, an accountant or a broker?

Incidentally, I've had a recommendation for an accountancy/advisory service - RSM Bird Cameron in Fremantle. Does anyone use them and would also recommend? They do financial planning as well, would you say it's better to use separate advisors or is a one-stop-shop approach ok?

Your structure so far looks fine, but you're right - the offset account is probably something you should have done sooner

Yes... well it is done now, better late than never I suppose.

Don't get too stressed about joint ownership of a property or two with other parties.

Excellent, that is great news.

Your broker and accountant don't have to be location specific, but conveyancing is a state-by-state deal.

Is a lawyer/solicitor an essential part of your team for the more strategic aspects of investing? I imagine this might be more important later down the track rather than when just starting out?

It may be prudent to also consider capital growth strategies for the odd property here and there. This might tie in well with a renovation or development strategy.

Hence the reason for being unsure how to best proceed. I'd like to buy several IP's in Perth within the next 12 months or so but they're likely to be negatively geared and would probably make me hit my borrowing limit.

The objective is to build a continuous income which the banks will recognise as a business income.

Ahh, this answers my other question about how to get loans if no longer employed.

Excellent post PT_Bear, thanks again.

 

[Peter_Tersteeg]

In most residential transactions, solicitors or conveyancers are really only used for ensuring the transfer of property ownership goes smoothly. Certainly there's the occassional scenario that requires more detailed legal advice, but very few investors go into deals where solicitors become a more integral part of an overriding strategy.

No disrespect to solicitors and of course there is exceptions, but until people are looking at getting into higher level developments, conveyancing is more transactionally based than strategic.

It is very important to understand your financial capabilities early on. There's no point looking at a strategy that you just don't have the financial resource to implement. This is where you need to collaborate with a broker.

Secondly you need good tax advice. It's too late to change ownership structures once the property has been bought. I don't suggest that people make their investment decisions based on tax, but getting your tax structures right early on will save or make you a lot of money.

Financial planning is certainly useful with property investing and it should be a very strategic view. Real problems occur however when it becomes more transactional. Financial planning should be used for things like risk management strategies and wealth management strategies. As a general rule I would strongly avoid planning advice that suggests you should be buying specific properties and I even suggest that a planner that does this should be avoided. Using a planner for financial analysis on specialist properties such as NRAS or buying within self managed super is fine, but specific property recommendations is not.

If you are after advice on specific property purchases, look to a buyers agent.



My comments about getting your property activities to the point where it's viewed as business is primarily from a finance point of view. If you want to continue to borrow money, you need to demonstrate a regular and sustainable income. For the self emlpoyed this is done through consistant tax returns and financial statements over 2 years.

The challenge with a property development or renovation business is that turnover needs to constant and consistant. In that sort of business it can be especially difficult. In its infancy, these businesses are often geographically contrained to a general location. If the market is in a downturn then the business may be put on hold for a period of time which doesn't work well for a consistant income.

This sort of business needs to have multiple projects at any given time to be able to acheive the requried turnover to satisfy lenders. Multiple projects requires a substantial amount of capital to get running. As a result, it can often take many years to get a property development business trading in its own right.

Most people run it by having one partner employed in a regular job to bring cashflow and servicing for the banks, whilst the other partner works within the business. Unfortunately most people can't simply quit their job and become a developer the next day in their own right.

 

[Terry_w]

Some good posts there PT.

As a solicitor I agree with PT. You may want to consult a solicitor about asset protection, structure and estate planning issues (don't forget wills and powers of attorney/guardianship etc) but a separate conveyancer/solicitor in each state is needed for the conveyancing.

The tax structuring side of things is very important too. But I think the most important is getting the finance right as if there is no finance then there will be no structure to worry about.

 

[Of The Vultures]

Thanks again, yet another informative post. I'll concentrate on getting my move over and done with and think about what I need to do in the meantime. Hope you don't mind if I PM you in a few weeks time Peter?

Cheers,