Please give me your feedback on my investment strategy!!!

[Mindmaster]

My original investment strategy was not very good so after doing a lot of reading, learning and studying some of the experts here and their advice, I have put together a new strategy.

I'm still dangerously clueless in property investmet so I'd be delighted to have your feedback on my new strategy. Feel free to be blunt and brutally honest if necessary.

Goal – To own a portfolio of at least 6 IP’s valued at over 2 million with an LVR a maximum of 60% and LOR within eight years.

Financial Situation - I’m an expat living in China making an annual net salary of around 63k with no debts other than property. Salary is not likely to increase much in the near future.

Portfolio at present – TwoIP's, IP 1 is in Sunshine and IP 2 is in Frankston North with a total value of 710k. Total weekly rent is $530 with and an LVR of 40%

Next Move – To purchase IP three which I will start looking for in Western Sydney in the next few weeks.

Method – To buy residential property below market value that has high yield with good capital growth bought under market value. High yield reduces serviceability problems, the strong capital growth will help with subsequent purchases and buying under value gives instant equity.

Requirements for IP3 and other future IPs are
-around 300k in value and be below market value by at least 20k
-minimum of 7% yield
-houses and townhouses/villas are both ok. A house should be 600m2 plus and a townhouse/villa would need to have a land component of 30% (thanks Rixter)
-enough CG to double every 7-10 years
-good condition (after basic reno) to minimise se maintenance/repair costs and to more easily attract tenants

Not required
-negative gearing and tax deductions because I don’t pay tax in Australia
-large value adding through big renovations because I have no renovation skills and live too far away
-new or near new properties for tax benefits

Not essential but preferable
-suitable for granny flat out the back if a house

How to find these IP’s
-Use buyers agents and/or property search services offered by some of the businesses on this forum

Renos
-I’d use renovation specialists line these guys http://www.makinresidential.com.au/ or a recommended builder IF there is a decent enough ROI

What do you think?

 

[Aaron_C]

Sure that's fine on paper but your income is really limited. Esp since each successive property you buy, even with a 7% yield (which is unlikely for a house/townhouse) will diminish your borrowing capacity

 

[Mindmaster]

Hi Aaron, thank you for your comment. I understand and agree with you. I can see myself struggling to get finance for IP four. This strategy is the best I can come up with to minimize problems with borrowing capacity.

Any strategy suggestions for dealing with borrowing capacity issues?

Sure that's fine on paper but your income is really limited. Esp since each successive property you buy, even with a 7% yield (which is unlikely for a house/townhouse) will diminish your borrowing capacity

 

[BV]

Brendon
Your plan looks ok.
How did you finance the last 2 deals?
What type of loans are they?
I'd start by trying to get the equity out

 

[Aaron_C]

Any strategy suggestions for dealing with borrowing capacity issues?

None other than getting a higher paying job! Some people have suggested increasing borrowing capacity using insurance bonds from line of credits

 

[Rolf Latham]

Any strategy suggestions for dealing with borrowing capacity issues?

Hi MM

I assume u are in China for reasons other than just money.

If thats the case, finding more income from a job basis isnt going to be ideal for you.

Can you commence some form of business ?

While this wont work for you immediately, unless you get a whole bunch more cashflow between now and year 8, the end game target of your strategy will run out of fuel.

ta
rolf

 

[Mindmaster]

Brendon
Your plan looks ok.
How did you finance the last 2 deals?
What type of loans are they?
I'd start by trying to get the equity out

Hi Bill, The first IP was financed through a non bank lender and was simple and easy. The second IP was financed using the help of a top Mortgage Broker who is on the forum and involved using equity in IP1. The same MB is doing finance for IP3 and using equity from IP1 and IP2 as you suggested.

So getting IP3 is not a problem. The trick is to make sure I'm using a good strategy and IP3 matches that strategy.

Hi MM

I assume u are in China for reasons other than just money.

If thats the case, finding more income from a job basis isnt going to be ideal for you.

Can you commence some form of business ?

While this wont work for you immediately, unless you get a whole bunch more cashflow between now and year 8, the end game target of your strategy will run out of fuel.

ta
rolf

Hi Rolf, My father was a gypsy lived in 7 countries and I bailed out of both my graduations to see the world so you are right, I'm not in China for just the money This strategy is the best I can come up with that will allow me to accomplish the goals listed above while living in China. Now I need to tweak/change the strategy to make it as realistic and effective as I can.

 

[sanj]

id consider flogging off one your properties. they're currently returninf 3.8% gross on market val, considering you want to grow pretty quickly but have a limited income i dont think you can afford heavily negatively geared properties.

is there any reason for the bad yield? are they development sites with old homes on them etc? is there any value adding you can do?

 

[BV]

id consider flogging off one your properties

That was my initial thought as well but I don't know his particular circumstances and the location of the IP's

 

[Mindmaster]

id consider flogging off one your properties. they're currently returninf 3.8% gross on market val, considering you want to grow pretty quickly but have a limited income i dont think you can afford heavily negatively geared properties.

is there any reason for the bad yield? are they development sites with old homes on them etc? is there any value adding you can do?

That was my initial thought as well but I don't know his particular circumstances and the location of the IP's

Hi Sanj, IP 1 is an old weather board on one of Sunshine's better streets that is waayyyyy past its prime with a gross yield of 3.3 miserly %. It's saving grace has been a doubling of value in 6 years. IP 2 is on one of Frankston North's better streets with a gross yield of 4.5% and a CG in the two years since I bought it that is not worth talking about.

They are 604m2 and 650m2 respectively so development sites. I had thought of selling one of them if necessary to fund purchases with better yields but hate the idea of selling. An emotion that I need to over come in the game of investment that is all about numbers.

THe practical problem of selling IP 1 is the government would take a large cut in CG taxes. Someting I'd need to speak to an accountant about before considering the idea seriously.

In terms of this strategy, selling a low yield IP would be one option if there were serviceability problems for IP 4. Alternatively develop IP 1 if the development would be cashflow positive and delay buying IP 4 and if there were serviceability problems with the development, sell IP 2 to fund it.

Would that fit with the strategy and/or make the strategy more workable do you think?

 

[skater]

The yeild on those two properties is rather poor. Are you able to increase rents?

IMHO, if your income is low, then you can't afford to keep properties that have a dismal yeild. Not only are they going to cost you many $$, you also have the problem of not being able to neg gear, being an ex-pat, so all losses have to come from tax paid $$.

If I was going to target one to sell, I'd probably look at the Qld one with the low yeild. It's already had great CG, so may not get more for a while and the yeild is the lowest. Mind you, I don't know the market in either North Frankston or Sunshine, so if selling one of them is on the agenda, I'd probably look at how long properties are taking to sell & market forces in the area first before deciding which to sell, or, indeed, if I was going to sell at all.

You will easily find properties with a 7% (or greater) yeild on decent sized blocks in Western Sydney, however most of those are going to be older, ex-housing commission places. You won't get the nice depreciation benefits of a new place, which is probably irrelevant to you anyway. What you will get though, is the ability to put a granny flat on the rear (easy in NSW) to get an even better yeild, but that will be dependant on your serviceability.

Good luck.

 

[locko24]

Personally, i'd sell the Frankston place and buy this place:

http://www.realestate.com.au/property-house-nsw-boggabilla-105644671

Who said you can't find positively geared places anymore?

 

[willair]

They are 604m2 and 650m2 respectively so development sites. I had thought of selling one of them if necessary to fund purchases with better yields but hate the idea of selling. An emotion that I need to over come in the game of investment that is all about numbers.

If that's the case then you are better to hold the development sites no matter about the rental return,when you sell or develop that,s when the books balance out from several different angles,btw i know nothing about the area you are investing in but every one i know that have become very rich from property over a very long period,the others just got blown out of the water with greed and sell at the wrong time..

 

[quoll]

I'd be looking at either:
1- Sell current IP's and buy more with better returns.
2- Wait for rents to go up and not buy until you meet serviceability criteria.
3- Find a property deal that you can get into which will allow you to chop of a bit of land and sell it, (current market is really crap so selling will be difficult)

cheers
Graeme

 

[Propertunity]

Hi Brendon,

Just a few thoughts to add to what the others have said.

"Your Goal – To own a portfolio of at least 6 IP’s valued at over 2 million with an LVR a maximum of 60% and LOR within eight years." but you only have an income of $63K which does not look like it has potential to increase from what you've said. On top of this you are holding neg. geared IPs with no tax benefits because you live in China.

Short of a miracle, you can't achieve your goals by continuing to do what you are doing. As they say, the definition of insanity is doing the same thing over and over and expecting a different result.

Firstly, you need more cash. You can either earn it in you job or trade shares, options or CFD's, or start a business, or make it in property. You are sitting on development sites. One of these has a stack of equity in it. Consider actually doing the developments to make the cash before progressing with more IP purchases. If the developments don't stack up profit-wise, consider holding until the numbers work, or consider cutting your losses and selling down.

Then rejig your portfolio. Only buy property that has a 7% yield (but not out in the sticks). As Skater said - house on land big enough to build a granny flat or house + existing granny flat in W. Sydney....or Rixter's plan with t/houses.

Also consider doing developments on an ongoing basis to fund more cash deposits which you are short of (which I see as being the limiting factor in your strategy). This can be done by buying an older house in need of a reno but with a backyard that can be sub-divided off. This may take 12-18 months to get approved etc but can add $80K-100K to your cash balance, or the sale of the newly created block can pay down the mortgage of the existing house making it go cash flow positive.

The problems I see with your plans to:
"use a buyers agent to purchase around 300k in value and be below market value by at least 20k" is this:
1. You will be paying a BA up to $10K and this will eat into your $20K instant equity anyway.
2. How do you know you are buying $20K under market, really?? No-one can acurately get within + or - 5% of a property's real value. 5% of $300K is $15K - so that is the margin of error you're working with
3. A BA cannot 'magically' buy property $x under market value anyway. Look, it can and does happen with distressed sales etc. (and we do it) but as a strategy to lock in instant equity, it has its issues.
In any event, I think you'll need to use a BA anyway because of where you are. You can't just pop on a flight to Oz to do inspections every week-end or if a bargain turns up mid-week.

The problems I see with your plans to: "use renovation specialists line these guys http://www.makinresidential.com.au/ or a recommended builder " is:
1. Most of the equity you manufacture in a reno (in say a $1 spend for a $2-3 increase in end val) will be taken by the profit margin of the builder. You can do this sort of stuff and project manage it if you are on-site but trying to do this remotely from China, IMO, is a recipie for not making money, unless you have the right contacts.

Overall, I think you can achieve your goals but you need to take some hard decisions on your existing portfolio first and then spring into action with the new strategy. All the best with it, going forward.

 

[Mindmaster]

The yeild on those two properties is rather poor. Are you able to increase rents?

IMHO, if your income is low, then you can't afford to keep properties that have a dismal yeild. Not only are they going to cost you many $$, you also have the problem of not being able to neg gear, being an ex-pat, so all losses have to come from tax paid $$.

If I was going to target one to sell, I'd probably look at the Qld one with the low yeild. It's already had great CG, so may not get more for a while and the yeild is the lowest. Mind you, I don't know the market in either North Frankston or Sunshine, so if selling one of them is on the agenda, I'd probably look at how long properties are taking to sell & market forces in the area first before deciding which to sell, or, indeed, if I was going to sell at all.

You will easily find properties with a 7% (or greater) yeild on decent sized blocks in Western Sydney, however most of those are going to be older, ex-housing commission places. You won't get the nice depreciation benefits of a new place, which is probably irrelevant to you anyway. What you will get though, is the ability to put a granny flat on the rear (easy in NSW) to get an even better yeild, but that will be dependant on your serviceability.

Good luck.

Hi Skater, You are right, the yields are dismal. Increases are not likely in the near future because IP1 rent increased by 20% a couple of months ago and IP2 rent is set to increase in a few weeks. The figures used here are the increased rent

As you say, low yield IPs like those don't support a positive cash flow strategy and one likely option is for them to be culled. Will consider that and do number crunching after buying IP3 and before buying IP4.

I like your suggestion for IPs with good cashflow in Western Sydney and will defiinitely be looking into that.

If that's the case then you are better to hold the development sites no matter about the rental return,when you sell or develop that,s when the books balance out from several different angles,btw i know nothing about the area you are investing in but every one i know that have become very rich from property over a very long period,the others just got blown out of the water with greed and sell at the wrong time..

Hi Willair, holding those IPs is tempting and as you say, CG and or development potential can make up for poor yield. In the end it will be up to the numbers and see what option has the best outcome.

I'd be looking at either:
1- Sell current IP's and buy more with better returns.
2- Wait for rents to go up and not buy until you meet serviceability criteria.
3- Find a property deal that you can get into which will allow you to chop of a bit of land and sell it, (current market is really crap so selling will be difficult)

cheers
Graeme

Hi Graeme, Option one is likely. Don't like being passive so not a fan of option two and option three sounds good and similar to propertunity's suggestion.

Hi Brendon,

Just a few thoughts to add to what the others have said.

"Your Goal – To own a portfolio of at least 6 IP’s valued at over 2 million with an LVR a maximum of 60% and LOR within eight years." but you only have an income of $63K which does not look like it has potential to increase from what you've said. On top of this you are holding neg. geared IPs with no tax benefits because you live in China.

Short of a miracle, you can't achieve your goals by continuing to do what you are doing. As they say, the definition of insanity is doing the same thing over and over and expecting a different result.

Firstly, you need more cash. You can either earn it in you job or trade shares, options or CFD's, or start a business, or make it in property. You are sitting on development sites. One of these has a stack of equity in it. Consider actually doing the developments to make the cash before progressing with more IP purchases. If the developments don't stack up profit-wise, consider holding until the numbers work, or consider cutting your losses and selling down.

Then rejig your portfolio. Only buy property that has a 7% yield (but not out in the sticks). As Skater said - house on land big enough to build a granny flat or house + existing granny flat in W. Sydney....or Rixter's plan with t/houses.

Also consider doing developments on an ongoing basis to fund more cash deposits which you are short of (which I see as being the limiting factor in your strategy). This can be done by buying an older house in need of a reno but with a backyard that can be sub-divided off. This may take 12-18 months to get approved etc but can add $80K-100K to your cash balance, or the sale of the newly created block can pay down the mortgage of the existing house making it go cash flow positive.

The problems I see with your plans to:
"use a buyers agent to purchase around 300k in value and be below market value by at least 20k" is this:
1. You will be paying a BA up to $10K and this will eat into your $20K instant equity anyway.
2. How do you know you are buying $20K under market, really?? No-one can acurately get within + or - 5% of a property's real value. 5% of $300K is $15K - so that is the margin of error you're working with
3. A BA cannot 'magically' buy property $x under market value anyway. Look, it can and does happen with distressed sales etc. (and we do it) but as a strategy to lock in instant equity, it has its issues.
In any event, I think you'll need to use a BA anyway because of where you are. You can't just pop on a flight to Oz to do inspections every week-end or if a bargain turns up mid-week.

The problems I see with your plans to: "use renovation specialists line these guys http://www.makinresidential.com.au/ or a recommended builder " is:
1. Most of the equity you manufacture in a reno (in say a $1 spend for a $2-3 increase in end val) will be taken by the profit margin of the builder. You can do this sort of stuff and project manage it if you are on-site but trying to do this remotely from China, IMO, is a recipie for not making money, unless you have the right contacts.

Overall, I think you can achieve your goals but you need to take some hard decisions on your existing portfolio first and then spring into action with the new strategy. All the best with it, going forward.

Hi Propertunity, WOW, thank you for putting so much effort into your post. A big help and I really appreciate it. Your directness is also good and what I need.

The strategy goal is a bit unrealistic but can be acheived with out a miracle if I am a little more moderate. The net equity of my humble portfolio is a bit over 400k. I could increase that to 500k in the next few months if I wanted/needed to get rid of some loose assets. I can live very comfortably on 20k a year with no scrimping or saving so being conservative, my dispoable annual income is 35k. 8 years of of 35k would give 280k. So at the end of 8 years I'll have an equity of around 800k or more to give an LVR of 60% for a 2 mill portfolio. That figure does not take into account any CG on the portfolio.

Holding negative cashflow properties coud/would be a deal breaker and cause serviceability issues that would have to be fixed or I'd meet your definition of insanity.

I've read posts you have written where you discuss buying blocks, getting DA and selling a part of the block to make decent profit. A great method that I will definitely look into.

You are right about the BA problems and I recently had a BA politely tell the the same thing. She also referred me to you so I'll either PM or email you in the next few days

Another good point about renovations. I think about the only situation I should consider a reno is if there is a property with good yield and CG prospects at a good price that needs some work on it before it can be rented.

Thank you every one for all the fantastic feedbck I've received in this thread, your points/ideas/suggestions will help me change this strategy so it more realistic and effective.

 

[Propertunity]

Hi Propertunity, WOW, thank you for putting so much effort into your post. A big help and I really appreciate it. Your directness is also good and what I need.

You're welcome. It was a long post (for me) but you had a lot of issues and Qs going on there.

You are right about the BA problems and I recently had a BA politely tell the the same thing. She also referred me to you so I'll either PM or email you in the next few days

That's fine on both counts, but not the reason I posted. I'd be happy to help if I can. Cheers, Alan.

 

[AlmostBob]

I find markets in western Sydney western melbourne low class areas have high growth and high cf
bought $35k sell $90k in 12 months
bought $90k sell $158k in 14 months
doesnt matter if you like it, you arent going to live there
doesnt matter if they are transient workers, transient workers earn a fortune, (I did) casual industrial work pays better than medicine, those 'western suburbs hoons' with hot commodores, all my hoon mates paid cash for the commodore every time they crashed one

love distressed sales
love when the vendor's solicitor is a particular local firm, who dont recognize conditions in the sale
love alternate finances
love finding the worst house in a good area
love when 'all goods and chattels' includes four other transportable homes sited on the lot

but everything I know to do depends on being there to do it,
reno companies are there to make money for the reno companies

directly hiring trades, directly dealing with building inspectors, electrical inspectors, fire marshall, a valuation increase of 440K cost 163K​

everytime I see a reno show on tv, a reno with a 50k increase in value costs 60k

buyers agents, arent struggling to finance their next purchase,

all 40 units are within 100Km

 

[Mindmaster]

I find markets in western Sydney western melbourne low class areas have high growth and high cf
bought $35k sell $90k in 12 months
bought $90k sell $158k in 14 months
doesnt matter if you like it, you arent going to live there
doesnt matter if they are transient workers, transient workers earn a fortune, (I did) casual industrial work pays better than medicine, those 'western suburbs hoons' with hot commodores, all my hoon mates paid cash for the commodore every time they crashed one

love distressed sales
love when the vendor's solicitor is a particular local firm, who dont recognize conditions in the sale
love alternate finances
love finding the worst house in a good area
love when 'all goods and chattels' includes four other transportable homes sited on the lot

but everything I know to do depends on being there to do it,
reno companies are there to make money for the reno companies

directly hiring trades, directly dealing with building inspectors, electrical inspectors, fire marshall, a valuation increase of 440K cost 163K​

everytime I see a reno show on tv, a reno with a 50k increase in value costs 60k

buyers agents, arent struggling to finance their next purchase,

all 40 units are within 100Km

Hi AlmostBob, thank you very much for your post and feedback. I'll definitely consider our points.

Are all 40 unites within 100Km in Nova Scotia?