okay now i'm worried.

[Token Funder]

but the simple facts are you have the equitythere to use at any time for what ever you want

Better phrase would be "but the simple facts are you have the equity there to use as security for a loan for an amount and for a purpose that a lender will support".

No shortage of big, high profile businesses in strife at the moment that have assets-a-plenty but lenders reluctant to hand over the cash.

This is not to say that equity isn't extremely useful but let's not pretend it can be extracted without the support and at the discretion of "someone else".

TF

 

[Ausprop]

That's another little item you don't understand once the properties become unencumbered you get to milk those properties in several ways,rental return is just one,longterm C-G is another what happen shorterm is not important but the simple facts are you have the equitythere to use at any time for what ever you want,property investing works it's just the time factor you don't understand..willair..

wouldn't the only way to "milk" the CG be to encumber the asset? and if you have worked hard to unencumber it why would you turn around and start encumbering it?

 

[BayView]

My point is if property is all about CG and you plan to never sell then it really is a strange game as you can never get any benefit out of it.

Mate, did you not read ONE WORD of the post I made about the benefits you can get out of your cap growth?

Now I definitely know we are wasting our time on you YM.

 

[BayView]

Better phrase would be "but the simple facts are you have the equity there to use as security for a loan for an amount and for a purpose that a lender will support".

No shortage of big, high profile businesses in strife at the moment that have assets-a-plenty but lenders reluctant to hand over the cash.

This is not to say that equity isn't extremely useful but let's not pretend it can be extracted without the support and at the discretion of "someone else".

TF

No matter what the level of business you can think of, the no.1 destroyer of that business is cashflow - lack of it.

There is nothing wrong with using equity to fund another loan, providing there is sufficient cashflow to cover the outgoings.

But people make this mistake everyday, and it's not exclusive to the not-so-well off. People assume that big businesses are run correctly all the time. Sadly, not the case.

A common scenario with businesses is the Directors start to see reams of cash flowing in, and decide to use it to fund their ever-increasing lifestyle, or buy other assets that don't have good cashflows, and the original business then suffers a cashflow shortage. Disaster is imminent.

That is an operator error - not the strategy of borrowing using other equity.

If I can find a business that, after every single expense (and my own wages) - including the loans consisting of my own equity plus a loan from a Lender, and is fully managed, which means I don't have to physically do any of the work if I don't want to, runs a nett profit after tax, that I then re-invest into the business to decrease the LVR and increase the equity; is that not a good a thing?

 

[VCDenton]

so is the whole idea is to

1. first accumlate asset class like residential properties which tends to manufacture good capital growth
2. the second stage then is actually the step you take to escape the rat race, by borrowing off the equity and invest in high yielding assets/business which actaully makes you wealthy(I mean you can finally buy a nice care and ppor and lifestyle.

if the above are basically the steps, is the current environment not a good time for step 2 implementation due to the credit crunch which limits your ability to 'extract' the capital growth you already accumlated in earlier years?
but how about if I start the first stage now or next year?

Regards
VInce

 

[BayView]

so is the whole idea is to

1. first accumlate asset class like residential properties which tends to manufacture good capital growth
2. the second stage then is actually the step you take to escape the rat race, by borrowing off the equity and invest in high yielding assets/business which actaully makes you wealthy(I mean you can finally buy a nice care and ppor and lifestyle.

if the above are basically the steps, is the current environment not a good time for step 2 implementation due to the credit crunch which limits your ability to 'extract' the capital growth you already accumlated in earlier years?
but how about if I start the first stage now or next year?

Regards
VInce

That's the plan Vince. So, the cap gain in the portfolio is not just sitting there "on paper" doing nothing. It is utilised to acquire more assets that provide more cashflow and more cap gain.

There is no doubt that starting now for many is going to be harder, as many property markets are starting to show signs of slowing down - but not all of them will; you just have to find the ones that are still going up.

You can still buy properties that;
1. return good yields,
2. good depreciation and other tax deductions etc,
3. and also reduce the debt as you go (some will say it's a bad strategy to reduce debt, but as a previous business owner I can promise you it is smart).

The combined effect of 3 factors will accelerate your equity position faster while waiting for the next boom.

The current finance/credit environment is certainly a lot tougher than it was 5 years ago - if you are in a weaker financial position.

Those who are solid financially - have lower LVR's and good cashflows and servicability - will always be able to access finance of some sort. This is also made easier if you are looking to use your cap gain for something like a business that has a good history and good existing cashflows. Don't forget; the business is going to provide part of the security that the Bank is looking for, and if the cashflow is very good then your chances of obtaining finance are always better, but the LVR they will lend on will be lower - typically around 60%. This will cut out those with higher LVR's and servicability issues in their existing portfolio.

Of course; the cost of finance today is higher, and harder to obtain, but for those who can get it, there are still going to be plenty of opportunities to get richer.

Basically, lots of cap gain gives you more options. You can choose to cash out and stick it in the shoebox, or access it by way of equity borrowing to grow the gain exponentially through other investments with high yields and growth.

I know which option I'll take.

 

[VCDenton]

That's the plan Vince. So, the cap gain in the portfolio is not just sitting there "on paper" doing nothing. It is utilised to acquire more assets that provide more cashflow and more cap gain.

There is no doubt that starting now for many is going to be harder, as many property markets are starting to show signs of slowing down - but not all of them will; you just have to find the ones that are still going up.

You can still buy properties that;
1. return good yields,
2. good depreciation and other tax deductions etc,
3. and also reduce the debt as you go (some will say it's a bad strategy to reduce debt, but as a previous business owner I can promise you it is smart).

The combined effect of 3 factors will accelerate your equity position faster while waiting for the next boom.

The current finance/credit environment is certainly a lot tougher than it was 5 years ago - if you are in a weaker financial position.

Those who are solid financially - have lower LVR's and good cashflows and servicability - will always be able to access finance of some sort. This is also made easier if you are looking to use your cap gain for something like a business that has a good history and good existing cashflows. Don't forget; the business is going to provide part of the security that the Bank is looking for, and if the cashflow is very good then your chances of obtaining finance are always better, but the LVR they will lend on will be lower - typically around 60%. This will cut out those with higher LVR's and servicability issues in their existing portfolio.

Of course; the cost of finance today is higher, and harder to obtain, but for those who can get it, there are still going to be plenty of opportunities to get richer.

Basically, lots of cap gain gives you more options. You can choose to cash out and stick it in the shoebox, or access it by way of equity borrowing to grow the gain exponentially through other investments with high yields and growth.

I know which option I'll take.

As both a newbie and new graduate, I think at this stage minimum holding cost is a priority for me as all the fantastic future growth is meaningless to me if I cannot hold long enough given todays market.

My question is if you suggest that I should buy those properties that return good yield say above 8%, does it mean go regional(not good for me at all first I cannot read the local market let alone regional...), if a unit/townhouse is returning like above 6% do you think it 'return good yields, '?

Also does 'good depreciation and other tax deductions etc, ' means I should buy those with building depreciation like those built after 1985 15th of July something like that?

Regards
Vince

 

[yieldmatters]

Mate, did you not read ONE WORD of the post I made about the benefits you can get out of your cap growth?

I read it and I just read it again now.

 

[BayView]

As both a newbie and new graduate, I think at this stage minimum holding cost is a priority for me as all the fantastic future growth is meaningless to me if I cannot hold long enough given todays market.

My question is if you suggest that I should buy those properties that return good yield say above 8%, does it mean go regional(not good for me at all first I cannot read the local market let alone regional...), if a unit/townhouse is returning like above 6% do you think it 'return good yields, '?

Also does 'good depreciation and other tax deductions etc, ' means I should buy those with building depreciation like those built after 1985 15th of July something like that?

Regards
Vince

Absolutely.

Of course, this is all relevant to your personal income. If you are an average income earner, you can't afford to be neg cashflowed by hundreds every week while you wait for cap gains like the high income earners can, and do.

You've gotta make every post a winner to accelerate your plan.

Don't be frightened off by "regional". These areas can provide excellent growth - if you pick the right area, the rent returns can be very good, and can be very solid for demand - less vacancies, more affordable for the newbie entry level. Due Diligence is always a premium.

While cap cities historically provide better growth (and other areas can outperform them) - as you say; it's no good if you can't afford the neg cashflow. We have no "inner city" properties and have enjoyed some excellent growth. I did have one at the start, but even though the growth was good, the neg cashflow was a killer. We sold it, reinvested into another more "regional" area with better rental yields and did much better overall.

Add to this the ability to add value through renos, or subdivisions in the future, good locations close to amenities, and built after 1987 for the depreciation - "on paper" or "non cash" deductions, and you can start off with a property that not only grows in value, but also provides you with virtually a no holding cost scenario - cashflow positive after tax. The properties built between 1985 and 1987 will give you 4% depreciation for 25 years - which is soon to run out. Go for the post 1987 ones; 40 years @ 2.5% depreciation.

You then re-invest all the profits (tax returns), and decrease the debt as you go through extra repayments, and in a few short years your nett worth has increased remarkably, and you are ready to go again.

Following this simple plan for the first few properties will get you to the "next level" faster and with less financial strain - the cashflows will be better, and your investing will be fun.

I would even recommend this plan for the higher income earning newbies too, but they often start off bigger (higher price-point) and with worse cashflows - just because they can.

Don't get me wrong; I want growth too, but I want the properties to support themselves so I don't have to. Why not have both?

 

[BayView]

I read it and I just read it again now.

And??

What's your verdict?

 

[yieldmatters]

The richest people in the world have billions in cap gain/nett worth. Their wealth is tied up in their assets - businesses and real estate, some of it in shares. They don't have the cash just sitting around in a shoebox or in their ING account.

I'm not suggesting they cash out now. But at some point they will have to if they want to enjoy ALL their wealth in this lifetime. Maybe though at their level of wealth they don't care - for them it is all about dying with the most assets! For regular people though with a few IPs at some point when they want a good passive income they are better to put the capital into something else which would require selling.

Worthless cap gain is superannuation sitting there for 40 years until you retire, with no access to it, and the day before you retire the stock market collapses and you lose the lot.

Can't disagree there. As you approach retirement age super should be wound back to low risk and then cash.

What about if I accumulate a ton of cap gain through my investments (IP's), then access the cap gain to buy one or several successful and cashflow positive businesses?

I can then live off the passive cashflow of the businesses, and/or reinvest it into other cashflow investments, or other assets that increase the cashflow and the cap gain.

And repeat.

The CG in the IPs is helpful in terms of security to get a loan. But could you not get a loan anyway if the business is cashflow positive and successful?

But it's now becoming a reality, and is almost at the stage where the need to work for earned income will end, and the life on the passive income alone will begin.

Understand - my point is more about the choice of investment vehicle in that passive income stage. If property is all about CG and only a little about rental income then that isn't much of a passive income. When you get to this stage (and have a low income tax year) why wouldn't you sell 1 or 2 and then put it into something with a higher yield? That's all I'm saying. Are telling me that you will NEVER sell your IPs - not even one of them - before you die?

The question is YM, are you going to use your cap gain for such a plan, or just sell out and count it everyday, with no chance to increase it from there?

What makes you think I don't invest in anything? I don't buy gold or commodity stocks either. I seem to be typecast somewhat!

 

[VCDenton]

LA. Aussie how about the outer suburbs or unit townhouse in middle suburbs of Melbourne compared to regional properties in terms of both rental yield and capital growht? assuming that they are all well located.

Regards
Vince

 

[BayView]

I'm not suggesting they cash out now. But at some point they will have to if they want to enjoy ALL their wealth in this lifetime. Maybe though at their level of wealth they don't care - for them it is all about dying with the most assets! For regular people though with a few IPs at some point when they want a good passive income they are better to put the capital into something else which would require selling.
It isn't about dying with the most assets. You keep rabbiting on with that ridiculous theme.
Some people simply do it because they love the thrill. It's like Jack Nicklaus still playing golf competitively; he's got nothing left to prove, and is worth about $200 mill, so doesn't need the money, but he still does it.
And the average person doesn't need to sell in order to leverage into other assets that will provide a passive income.
If the average person sticks to just one or only two IP's, they are doing it for the retirement aspect - they aren't seriously playing to get out of the rat-race soon, and you are right; they will need to sell their two IP's to see some reward before they die. However, I do know a couple of investors back over in the US who are retired now, living off their rental income very comfortably. Why would they sell? They don't see the need to.



Can't disagree there. As you approach retirement age super should be wound back to low risk and then cash.
Super is the investment of the financially uneducated who can't or won't learn to do better elsewhere. I'm going to be retired long before retirement age, with a passive income from the existing investments when I retire, that cover my lifestyle. I won't be needing super, or have to sell up to access the cash to live off. There's no need to sell, and I'm not in a comp to see who has the most assets in the cemetery either. But my son will be well off.


The CG in the IPs is helpful in terms of security to get a loan. But could you not get a loan anyway if the business is cashflow positive and successful?
You need to begin with the deposit. Given that many people can't even save enough deposit for a house when there are 90% loans available and FHOG's, what hope have they got if they need to kick in 40% as is the case with many commercial loans? On top of that, many people haven't got the skill or the desire or discipline to run a business - successful or not. Many talk about doing it, but few do it. The cap gain from the property is there to be used as the springboard to more investing into other income and/or cap gain assets, to do more of the same. In any case; the rental returns increase along the way, and will overtake the loan repayments and provide a passive income stream without any leveraging.
For those who are not going to follow that plan, then yes; they should sell up and realise the cap gain in cold hard folding - minus the cap gains tax of course.


Understand - my point is more about the choice of investment vehicle in that passive income stage. If property is all about CG and only a little about rental income then that isn't much of a passive income. When you get to this stage (and have a low income tax year) why wouldn't you sell 1 or 2 and then put it into something with a higher yield? That's all I'm saying. Are telling me that you will NEVER sell your IPs - not even one of them - before you die?
Where is the need? Currently, we have an earned income to support the lifestyle, while the rent supports the IP portfolio. The cap gain from this will be leveraged into income producing businesses and more IP's, which will further support the lifestyle, more IP's and businesses, which further support more businesses and more IP's and more lifestlye. And all the while the rents are going up. The yields on my initial investment just get better and better - more and more passive income.
There you go again with the terrible yields from property. More rabbiting about how we MUST be making a loss. That is only YOUR reality - not mine, and the whole idea is to combine cap gain and rental income from the IP's, to then leverage into more of same, and/or businesses that return good cashflows. All of which can - and are - done without ever selling the properties and copping a cap gain tax bill.

What makes you think I don't invest in anything? I don't buy gold or commodity stocks either. I seem to be typecast somewhat!

OK, so what are you currently invested in, and what are the returns? And don't "telephone number" me.
Are you using your own after-tax dollars, or an investment loan of some sort? What is your plan?

 

[BayView]

LA. Aussie how about the outer suburbs or unit townhouse in middle suburbs of Melbourne compared to regional properties in terms of both rental yield and capital growht? assuming that they are all well located.

Regards
Vince

Generally, well located anything in the middle and closer-in suburbs won't return a decent rent return (by my standards) due to the steady growth attached to well located city properties. However, the historical data says you'll get better growth as we've discussed - the growth keeps outpacing the rent increases.

Townhouses are good for depreciation (if they are newer), but not so great on add value (especially in a flat market), no subdivision, little land content and usually low on rent return. For example; you might get a 5% return in Melb with one right now in a middle suburb, but the finance is costing you 8.5% or more and it'll cost you at least $350k. That's a crap return, big neg cashflow, and there's no guarantee of any growth over the next 2 years.

You'll get plenty of r/e agents and other investors saying stuff like; "5% in this market is a great return". God I hate that statement.

But you might find somewhere 2 hours out of Melb/Syd/Bris etc, costs $180k, rents for $230 p/w (6.6% yield - still not good, but better - and rents are going up everywhere), on some land (future subdivision maybe), needs a bit of a reno, built in 1991 (depreciation), and the population is growing, new schools being built, new shops going up, roadworks etc; so the growth signs are good. That's a much better bet as your first attempt. Some people may be able to attest to even better returns than this in the recent past; it's not that hard. One of our IP's would sell today for $220k (we paid $105k for it) and rents for $270 p/w in a regional town; it has more than doubled in value in 4 years, and is still going up according to the recent sales, so they're out there.

Outer suburbs can be better for rental yields and cap growth than regional and middle suburbs, and vice versa. Don't blindly assume anything; do the research and find the area that is giving you the numbers you need.

 

[VCDenton]

With my buying power outer suburbs/regional is the bet for my first bite.
However I reckon being able to thoroughly research is quite an challenge. I did a search on research and due dillenge on this forum but still didn't get the whole picture is there any book or another resource that you can suggest?

Regards
Vince

 

[JIT]

Where is the need? Currently, we have an earned income to support the lifestyle, while the rent supports the IP portfolio.

So you have no passive income at all now, yet you are planning to retire soon-ish???

 

[BayView]

So you have no passive income at all now, yet you are planning to retire soon-ish???

The rent covers more than the loans these days (debt reduction for the last 3 years plus rental increases) and the earned income work is now not full time (thankfully). PPoR and cars are all paid for long ago, and no other debt.

With continuing rent increases as have occurred in recent years, and probably will continue for the next 1-2 years before a levelling off, combined with regular debt reduction and re-investing the profits (tax returns), the passive income is steadily increasing.

The existing usable equity is going to be (in the short term) invested into a business which throws off pretty solid after tax nett income, and will be fully managed in those figures. My role shall be mostly supervisory, and I intend to continue golf coaching part-time as well, while the wife will continue to work a couple of shifts per week as a Nurse to stay active. Both our incomes will be replaced by rental and business income.

Expected time-frame for complete rat-race exit is 18 months to 2 more years.

The IP acquisitions are going to take a back seat until this business is put to bed, and we have finished getting the PPoR (currently an IP) ready for sale at the end of next year (assuming the local market is in good shape by Spring 2009). The sale from this will fund the building of the new PPoR which will also be debt free. I think by then the timing will be good to go property shopping again.

The combined passive income of both the business and the current/ongoing rents will be enough for a comfortable and not extravagant lifestyle. We are not voracious consumers, have no other debt, and reduce our loans regularly.

The longer term plan (3-5 years) is to use increasing equity to leverage into another business/es similar to the current one, but hopefully on a larger scale, and the profits from it will be reinvested into more IP purchases, then repeat.

 

[ArJay]

Cheers for the excellent posts so far L.AA. Really interesting reading....

Can I ask, have you had prior experience the business/es you've been investing in?

Are there significant risks involved using equity from your IP portfolio to gear into business?

R

 

[RPI]

Using equity to access business

Businesses have much higher yields (term used for simplicity) compared to property. A retail electrical goods business will sell for around 1 years net profit plus stock, a service business might sell at 3-5 times net profit. Other business can sell at much higher ratios to this but we will use these for an example.

A managed service business sells at 3 times net profit purchase price $600k net profit $200k

Use your equity to take out $600k loan against property at 10% interest is $60k a year. You get $140k a year income from this business. If a growing business even better. Interests go up you still have a bit of leeway there before it starts affecting cashflow.

Simple example but I think this is the sort of thing that LA is looking at.

 

[ArJay]

Thanks RPI for the reply...

Sounds really interesting. Obvious that I'll have to do a fair amount of research before even contemplating this sort of venture.
Any good resources you can recommend?

How, generally, would you go about selecting which business to buylook into? Do most look at industries they are already familiar with or is it really more of a numbers game?

Cheers for your time
R