Next step --> what would you do...

Hey guys

I'm looking for some creative thinking / sound advice

My dream is to leave the rat race(replace my wage +some) and become a professional rent collector

What would you do...


CURRNT POSITION
---------------
-28 years old
-IP1 just paid off --> equity at least $280,000
-IP1 bringing in $270 ($1,100 net per month)
-wage $82,000 ($4,400 net per month)
-business income $700 net per month
-living expenses total $1,700(outgoing rent, food, bills, etc)

$4,500 net cashflow


I live in melbourne and would look at investing in something here - i don't yet have the courage to consider investing in other states just yet

thanks
 
Spend a few hundred bucks on a licensed independent financial advisor.

I don't think that's a good idea...

Maybe look to try and manufacture some capital growth through value-add? GYou're doing pretty well so far so you can take a bit more risk now.
 
What would you do...

You're doing well. If I was in your position, I'd look at using your equity to by a commercial IP - neutral or slightly positively geared. Put it in a trust, pay it down, and buy another. etc.

Regards Jason.
 
If you have paid off your IP totally I would disconnect my home loan with that bank (If you haven't already)

Approach either the same bank or another and set up a line of credit (LOC) with 100% offset account and look for another property in the right price range and pay cash for it.(Therefore getting it way cheaper) Add value by renovation,

Add another LOC ,duplicate the process and do this a couple of times a year :D

Every three houses you should have enough equity for the banks not to want the title deed (As you are paying cash) to the property and these are valuable items to have in the safety deposit box if you need money down the track or for retirement.

I believe (Others might have other ideas and I could be wrong) the secret to success is to have that one home paid off completely and do the above process.You have achieved this at a young age as some others take till they are 40 to achieve this if not at all,

By bypassing the PPOR this is achieved earlier.
 
Thanks guys

All your comments are truly appreciated

- yep defiantly trying to increase the business income

- commercial property is something that interests me greatly due to the attractive yields - i definitely see this as part of my strategy in the near future - The next purchase will be residential though as i may choose to live in it in the coming years

- i don't know much about trusts but i did investigate the idea a a few years ago. I explained to my accountant that i plan to purchase as much property that i could afford and he advised that it would be ok to keep them just in my name. i was interested in trust arrangements to keep man-eaters at bay. by this i mean that if i lived with a defacto / got married and heaven forbid it went pear shaped all that i had worked so hard for would be well and truly protected (eg. not split in half). I think the answer i got from my accountant is that they still could get to it?? arrh cant remember now but i should look into researching this one again. I also understood that there are tax advantages in being able to appoint family member(s) in the trust to apportion various inflows to avoid paying tax.

- Pa1nter - the current loan is still there and all the funds are in the 100% offset account. I understand this to be a LOC arrangement. I'm hearing that if the value of the property is correctly valued at $280,000 i would ask for the bank to change the loan to $280,000 and have $280,000 sitting the offset account. then purchase a new property for $280,000 cash and place the tile for IP2 in a safety deposit box(im not sure exactly how paying cash gives me a discount). The $280,000 outstanding balance is then secured against IP1. I wouldn't have though of this. i was just thinking that IP1 is now paid off and IP1's title would now sit in the safety deposit box and IP2's loan would be sured by IP1. In actual fact i was just planing on taking the funds from IP1's offset account and using it as a deposit for IP2.
 
'I'm hearing that if the value of the property is correctly valued at $280,000 i would ask for the bank to change the loan to $280,000 and have $280,000 sitting the offset account'

Hi BigV from my understanding that the bank can only release u 224000 as equity in ur offset acc assuming u want to borrow back 80%?
 
He wants to grow his wealth. Not be told that buying another property is risky and shouldn't be done.

You don't have to go to an accountant for financial advice, you go to an accountant to work out how to minimise your tax and get a good appreciation for what you can afford. Basically tell them roughly what your goals are, and ask them to crunch the numbers. Obviously step one is to get at the equity build up in the IP.
 
Well, we all know that property doubles every 7-10 years.

Buy the most expensive property you can afford... if you buy a $1 million property over a $500k property, you are going to generate an extra $500k more...

Then once you've doubled that $1 million property into a $2 million property over a $500k property into $1 million, you double it AGAIN.... so that $2 million becomes $4 million, whereas the $500k property is only worth $2 million --- see how quickly that gap expands?
 
Well, we all know that property doubles every 7-10 years.

Buy the most expensive property you can afford... if you buy a $1 million property over a $500k property, you are going to generate an extra $500k more...

Then once you've doubled that $1 million property into a $2 million property over a $500k property into $1 million, you double it AGAIN.... so that $2 million becomes $4 million, whereas the $500k property is only worth $2 million --- see how quickly that gap expands?

I sincerely hope that was sarcasm...

Rooster
 
- Thanks for bringing this up RE: ~$224,000. I had a vague idea that the banks would only lend around the 80% mark but now that you mentioned it confirms it - cheers


- as for my accountant he has been encouraging my to take the next step for some time now. eg buy something to get some deductions happening. I agree that a good accountant is all about trying to maximise the ROI via deductions + depreciation. as for the advice he has also been handy for providing real life examples of his other clients. eg their strategies (anonymously of course). It has always been great food for thought.


- Bon - if only the 7-10 year doubling theory was guaranteed!! do you have a reliable crystal ball or something?? i like the idea of acquiring small units that would total the $1million of good debt (eg. 4 @ 250,000 or 3 @ 333,000) as i think most would agree that there would be a greater chance of them individually going up buy a larger percentage.
 
Property has doubled on average every 7-10 years for the last 100 years, what more do you need? Plus, there is a dwelling shortage supply in our country, coupled with an expanding population which means it's only going to get worse!
 
I've had to go back a little further than Bon said, as I couldn't find any house prices from 1911, but I found a real estate list from 1864 on the State Library for Victoria website.

The prices are listed in pounds, rather than dollars, but the RBA Pre-Decimal Inflation Calculator reckons on the conversion rate being approximately $2 to £1.

It's also possible to find inflation figures going back to 1850. This uses an index based on 1945 (equals 100).

Mixing the inflation stats and calculator together suggests that £100 in 1864 would be worth around $4,000 today.

I don't know what wages were in the 1860s, but the figures suggest a deflationary period, and in 1910 a factory worker was getting around £160 a year, whilst a clerk or manager was on about £265. I imagine the figures would have been broadly similar in the preceding years.

So what would the astute investor in 1864 pick up?
  • Blackwood Street: Two wooden houses and a stable - £200.
  • Bouverie Street, Carlton: Two weatherboard cottages - £300.
  • Cardigan Street, Carlton: Quarter acre block - £260.
  • Faraday Street, Carlton: Two brick and stone cottages - £450.
  • Lygon Street, Carlton: Carlton Rifle Brigade Hotel - £1,400.
  • Wreckyn Street, Carlton: Two brick and stone cottages - £250.
  • Brunswick Street, Fitzroy: Large plot (55' x 132' deep) - £400.
  • Malvern Hill Road, Malvern: Large block - £300.
(As for rents, four houses on Spencer Street - numbers 7 to 10 - were each let out at £60 per year.)

The properties tended to be small, with two or three rooms, so a modern house would probably be roughly equivalent to the two nineteenth century cottages in most of the listings.

My rough guess would be that houses are now about 1,000 to 2,000 times more expensive (nominally) than they were back then. That would be on the order of 5% growth, which isn't significantly higher than the average 4% inflation over the last 110 years.

If Bon's thesis that houses double every seven to ten years is true, then you'd be looking at a multiple of between 25,000 and 1,000,000. (The former is 7%, the latter 10%.)

Clearly that hasn't happened.

That said, I expect that there were periods when house prices rose as fast or even faster than Bon's figures. The average rate of inflation between 1970 and 1990 was nearly 10%, and that would have increased values six fold over that period.
 
Compounding

Well at 5% growth it is feasible that the property has grown at that rate each year since 1864 (I don't know prices in Melbourne, so not sure what they are now), but $500K doesn't seem totally unreasonable. See figures below.

Year 5% pa growth 7% pa growth
1864 $400.00 $400.00
1865 $420.00 $428.00
1866 $441.00 $457.96
1867 $463.05 $490.02
1868 $486.20 $524.32
1869 $510.51 $561.02
1870 $536.04 $600.29
1871 $562.84 $642.31
1872 $590.98 $687.27
1873 $620.53 $735.38
1874 $651.56 $786.86
1875 $684.14 $841.94
1876 $718.34 $900.88
1877 $754.26 $963.94
1878 $791.97 $1,031.41
1879 $831.57 $1,103.61
1880 $873.15 $1,180.87
1881 $916.81 $1,263.53
1882 $962.65 $1,351.97
1883 $1,010.78 $1,446.61
1884 $1,061.32 $1,547.87
1885 $1,114.39 $1,656.22
1886 $1,170.10 $1,772.16
1887 $1,228.61 $1,896.21
1888 $1,290.04 $2,028.95
1889 $1,354.54 $2,170.97
1890 $1,422.27 $2,322.94
1891 $1,493.38 $2,485.55
1892 $1,568.05 $2,659.54
1893 $1,646.45 $2,845.70
1894 $1,728.78 $3,044.90
1895 $1,815.22 $3,258.05
1896 $1,905.98 $3,486.11
1897 $2,001.28 $3,730.14
1898 $2,101.34 $3,991.25
1899 $2,206.41 $4,270.63
1900 $2,316.73 $4,569.58
1901 $2,432.56 $4,889.45
1902 $2,554.19 $5,231.71
1903 $2,681.90 $5,597.93
1904 $2,816.00 $5,989.78
1905 $2,956.80 $6,409.07
1906 $3,104.64 $6,857.70
1907 $3,259.87 $7,337.74
1908 $3,422.86 $7,851.38
1909 $3,594.00 $8,400.98
1910 $3,773.70 $8,989.05
1911 $3,962.39 $9,618.28
1912 $4,160.51 $10,291.56
1913 $4,368.53 $11,011.97
1914 $4,586.96 $11,782.81
1915 $4,816.31 $12,607.61
1916 $5,057.12 $13,490.14
1917 $5,309.98 $14,434.45
1918 $5,575.48 $15,444.86
1919 $5,854.25 $16,526.00
1920 $6,146.96 $17,682.82
1921 $6,454.31 $18,920.62
1922 $6,777.03 $20,245.06
1923 $7,115.88 $21,662.22
1924 $7,471.67 $23,178.57
1925 $7,845.26 $24,801.07
1926 $8,237.52 $26,537.15
1927 $8,649.40 $28,394.75
1928 $9,081.87 $30,382.38
1929 $9,535.96 $32,509.14
1930 $10,012.76 $34,784.78
1931 $10,513.40 $37,219.72
1932 $11,039.07 $39,825.10
1933 $11,591.02 $42,612.86
1934 $12,170.57 $45,595.76
1935 $12,779.10 $48,787.46
1936 $13,418.05 $52,202.58
1937 $14,088.96 $55,856.76
1938 $14,793.40 $59,766.74
1939 $15,533.07 $63,950.41
1940 $16,309.73 $68,426.94
1941 $17,125.21 $73,216.82
1942 $17,981.48 $78,342.00
1943 $18,880.55 $83,825.94
1944 $19,824.58 $89,693.76
1945 $20,815.81 $95,972.32
1946 $21,856.60 $102,690.38
1947 $22,949.43 $109,878.71
1948 $24,096.90 $117,570.22
1949 $25,301.74 $125,800.13
1950 $26,566.83 $134,606.14
1951 $27,895.17 $144,028.57
1952 $29,289.93 $154,110.57
1953 $30,754.42 $164,898.31
1954 $32,292.15 $176,441.19
1955 $33,906.75 $188,792.08
1956 $35,602.09 $202,007.52
1957 $37,382.20 $216,148.05
1958 $39,251.31 $231,278.41
1959 $41,213.87 $247,467.90
1960 $43,274.56 $264,790.65
1961 $45,438.29 $283,326.00
1962 $47,710.21 $303,158.82
1963 $50,095.72 $324,379.93
1964 $52,600.50 $347,086.53
1965 $55,230.53 $371,382.59
1966 $57,992.05 $397,379.37
1967 $60,891.66 $425,195.92
1968 $63,936.24 $454,959.64
1969 $67,133.05 $486,806.81
1970 $70,489.70 $520,883.29
1971 $74,014.19 $557,345.12
1972 $77,714.90 $596,359.28
1973 $81,600.64 $638,104.43
1974 $85,680.68 $682,771.74
1975 $89,964.71 $730,565.76
1976 $94,462.95 $781,705.36
1977 $99,186.09 $836,424.74
1978 $104,145.40 $894,974.47
1979 $109,352.67 $957,622.68
1980 $114,820.30 $1,024,656.27
1981 $120,561.32 $1,096,382.21
1982 $126,589.38 $1,173,128.97
1983 $132,918.85 $1,255,247.99
1984 $139,564.79 $1,343,115.35
1985 $146,543.03 $1,437,133.43
1986 $153,870.19 $1,537,732.77
1987 $161,563.69 $1,645,374.06
1988 $169,641.88 $1,760,550.25
1989 $178,123.97 $1,883,788.76
1990 $187,030.17 $2,015,653.98
1991 $196,381.68 $2,156,749.75
1992 $206,200.77 $2,307,722.24
1993 $216,510.80 $2,469,262.79
1994 $227,336.34 $2,642,111.19
1995 $238,703.16 $2,827,058.97
1996 $250,638.32 $3,024,953.10
1997 $263,170.23 $3,236,699.82
1998 $276,328.75 $3,463,268.81
1999 $290,145.18 $3,705,697.62
2000 $304,652.44 $3,965,096.46
2001 $319,885.06 $4,242,653.21
2002 $335,879.32 $4,539,638.93
2003 $352,673.28 $4,857,413.66
2004 $370,306.95 $5,197,432.61
2005 $388,822.30 $5,561,252.90
2006 $408,263.41 $5,950,540.60
2007 $428,676.58 $6,367,078.44
2008 $450,110.41 $6,812,773.93
2009 $472,615.93 $7,289,668.11
2010 $496,246.73 $7,799,944.87
2011 $521,059.06 $8,345,941.02
2012 $547,112.02 $8,930,156.89
2013 $574,467.62 $9,555,267.87
 
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