Portfolio full of negatively geared props, or a balance?

Hi everyone,

I'm new to all this so I'll cut to the chase.
I have researched, read a lot of books and have recently engaged a buyers agent to source a property for me to begin my portfolio.

From my research this buyers agent has a solid reputation that checks out. However they recently told me that they specialize in sourcing negatively geared properties for maximum capital growth. They also recommend the finance model Jan suggests in her book. However I can't help but be attracted to the cash flow positive strategy....

My accountant has recommended I look at just negatively geared props as I am still working full time. However the plan in 10 years is to be not working at all.

So with my portfolio do you suggest I go for a range of both negatively geared and cash flow + properties, or should I stick with just the one method?

I'd love your thoughts,


Thanks

Dan
 
Hi everyone,

I'm new to all this so I'll cut to the chase.
I have researched, read a lot of books and have recently engaged a buyers agent to source a property for me to begin my portfolio.

From my research this buyers agent has a solid reputation that checks out. However they recently told me that they specialize in sourcing negatively geared properties for maximum capital growth. They also recommend the finance model Jan suggests in her book. However I can't help but be attracted to the cash flow positive strategy....

My accountant has recommended I look at just negatively geared props as I am still working full time. However the plan in 10 years is to be not working at all.

So with my portfolio do you suggest I go for a range of both negatively geared and cash flow + properties, or should I stick with just the one method?

I'd love your thoughts,


Thanks

Dan

Have you read Property Puzzle by Stuart Wemyss?? This book addresses this very question with specific and very well thought through examples which compare both a cash flow positive and a -ve geared approach. His conclusion is that the negatively geared portfolio will actually fare the best over time - not just in terms of capital growth, but rental growth will outstrip the positively geared model too.

But, it all depends on your own financial situation. Having a mix of both wouldn't be a bad thing in my opinion...


Regards Jason.
 
My accountant has recommended I look at just negatively geared props as I am still working full time.
Just a quick Q. Does yhour accountant take his own advice? Does he have a huge portfolio of neg geared IPs?

So with my portfolio do you suggest I go for a range of both negatively geared and cash flow + properties, or should I stick with just the one method?
Look Dan, most PIs can only handle 2 -3 neg geared IPs at a time unless they are high income earners.

You either have to engage in a combination of strategies or wait for your neg geared IPs rents to increase and go cf+ before you buy more.

Have a read of this thread: http://www.somersoft.com/forums/showthread.php?t=53662
 
His conclusion is that the negatively geared portfolio will actually fare the best over time - not just in terms of capital growth, but rental growth will outstrip the positively geared model too.

Conclusions are based on the future assumptions made. Make sure you understand these instead of just blindly accepting.

If the overall returns from one type are significantly higher than the other, then investors will buy the type with the higher returns, which increases its price and hence reduces its future returns in line with the other type.

Excluding debt from the investing decision, Warren Buffett buys high growth shares because tax is deferred on these vs high income shares.

When debt is include, which is the case with real estate, high rental yield properties make it easier to service the mortgage. However, with valuations so high at the moment, most properties end up being negatively geared in the first instance - and so the discussion is around the extent of negative gearing.
 
Get Jan's Property Investment Analysis software (PIA), and run your own figures with its projected portfolio. On an above average family income I did best with a portfolio that averages CF neutral, with CF- portfolio I wasn't able to service new properties after 3rd or 4th. But if you have high income, high depreciation, and heaps of equity that might be different.
 
Hi Dan

We believe that our long term wealth is measured by the amout of equity we have in property. To accomplish this we use both +cf and -cf.

Our +cf properties are properties we buy and on-sell with vendor finance and our -cf properties are the properties we plan to hold forever ;-) Our +cf properties maintain our lifestyle and support the -cf on our long term buy and holds.

We've bought and sold heaps of our +cf properties but not sold any of our buy and holds. They're our long term wealth. The +cf properties, for us, are just a cash flow business, just like any other business you might own.

We've found +cf vendor finance to be a great portfolio building tool and an excellent business.

Cheers, Paul
 
Hi everyone,

I'm new to all this so I'll cut to the chase.
I have researched, read a lot of books and have recently engaged a buyers agent to source a property for me to begin my portfolio.

From my research this buyers agent has a solid reputation that checks out. However they recently told me that they specialize in sourcing negatively geared properties for maximum capital growth. They also recommend the finance model Jan suggests in her book. However I can't help but be attracted to the cash flow positive strategy....

My accountant has recommended I look at just negatively geared props as I am still working full time. However the plan in 10 years is to be not working at all.

So with my portfolio do you suggest I go for a range of both negatively geared and cash flow + properties, or should I stick with just the one method?

I'd love your thoughts,


Thanks

Dan

Hi Dan,

Why get cf negative? Get 8% yield and cap growth at rate same as bluechips if not better.
 
Just a quick Q. Does yhour accountant take his own advice? Does he have a huge portfolio of neg geared IPs?

Look Dan, most PIs can only handle 2 -3 neg geared IPs at a time unless they are high income earners.

You either have to engage in a combination of strategies or wait for your neg geared IPs rents to increase and go cf+ before you buy more.

Have a read of this thread: http://www.somersoft.com/forums/showthread.php?t=53662

Hi and thanks for your reply. To be honest I need to quiz him more on his own portfolio. He certainly has one but I am not sure if it's all full of just negatively geared properties.

I really like the idea of having a portfolio with both + cash and - cash flow....but then it begs the question of how to structure finance, so the banks don't get scared off.

Do you use a line of credit or master facility to pay the shortfall on your existing -cash flow properties? And then how do you convince the banks to lend you more to secure another property?
 
Hi Dan

You mentioned, "I'm new to all this" so, if you start with one or two +cf properties, why would you need "to pay the shortfall on your existing -cash flow properties?" From their cash flow positiveness ;-) there isn't any shortfall.

I'm sure some of our fellow forumites from the Finance sub forum will be able to advise you on an appropriate financing structure.

Cheers, Paul
 
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I really like the idea of having a portfolio with both + cash and - cash flow....but then it begs the question of how to structure finance, so the banks don't get scared off.
Even -ve geared properties residential properties become positive over time, usually through a combination of debt reduction and rental growth. Once your first property becomes positive, you can add another and so on.

It's a slow approach but works.

Regards Jason.
 
Do you use a line of credit or master facility to pay the shortfall on your existing -cash flow properties?
There are many strategies:
1. Capitalise the interest on -ve geared properties for a period. (This has its own risks and will only last for so long until you canibalise all the available equity)
2. Use the +ve cash flow properties to fund the -ve ones
3. Use other income from share dividends, options trades, cash bonds or other business activities
4. Most PIs would just pay it out of their excess PAYG income set aside for funding investments


And then how do you convince the banks to lend you more to secure another property?
If you go slow and steady, as others have said, the rents will increase over time, so will your income, therefore your ability to repay increases over time. If you want to grow a portfolio quicker and more aggressively, then you will need to give up trying to convince the banks and just do low doc loans.

You probably need to sit down for a while with a good finance person or MB and discuss all your options. That, and read a few of the many good books on the subject.
 
I agree that quality blue chip property will grow better.....the only issue is that due to the -ve gearing you will not be able to build a sizeable portfolio.

as to rental on some properties outstripping others....depends. At the moment...in Sydney at least it is the outer suburbs that have the highest demand and rental growth.




Have you read Property Puzzle by Stuart Wemyss?? This book addresses this very question with specific and very well thought through examples which compare both a cash flow positive and a -ve geared approach. His conclusion is that the negatively geared portfolio will actually fare the best over time - not just in terms of capital growth, but rental growth will outstrip the positively geared model too.
 
Hi Dan

You mentioned, "I'm new to all this" so, if you start with one or two +cf properties, why would you need "to pay the shortfall on your existing -cash flow properties?" From their cash flow positiveness ;-) there isn't any shortfall.

I'm sure some of our fellow forumites from the Finance sub forum will be able to advise you on an appropriate financing structure.

Cheers, Paul


Hi Paul, well I already have one -cash flow property which was my PPOR, and now I am looking to buy another small apartment here in Melbourne.
However following that, I think +cash flow is the best strategy for balancing things out.

As someone with considerable experience with +cash flow properties, what do you think of some of the buyers advocate companies who claim to have access to these properties right through the country? From my calculations, a lot of them were only cash flow neutral....

Thanks

Dan
 
So with my portfolio do you suggest I go for a range of both negatively geared and cash flow + properties, or should I stick with just the one method?

Dan

I don't think Australian +cf properties make sense unless you can secure 100% finance and still keep the property +cf. Also you must be absolutely sure there is significant demand for your rental property. and hopefully get some growth out of it aswell.

Why do I say this?

1) If you don't have 100% finance, and have put down a deposit of say 20% on the property, your return on equity is actually very poor.

ie: say the property costs $500,000 and you have put down a 20% deposit. The remainder is borrowed at 6.5% ($26,000 p.a.) but you are renting it out for say $600 per week ($31,200 p.a.) so you are +cf $5,200 p.a.

That represents a ROE of 5.2% ($5,200/$100,000) which is less than bank term deposit rates for alot more risk! Not to mention this simple example hasn't factored in: stamp duty, rates, body corporate potential, agent fees, property damage etc.

2) +cf properties tend to be in regional areas where price growth prospects are lower than inner city properties because demand for housing and population growth/economic expansion is lower.

If you don't constantly have tenants occupying the property, you may find that your +cf status fluctuates alot (or become -cf)

Just my two cents....
 
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