Stategies - What is your strategy?
- Thread starter Alex P Keaton
- Start date
Our strategy up until now has been to buy when we can afford it and hold it. We now have 5 IP's (used to have 7) and a block of land which will become our next PPoR. We have used our PPoR for deposits.
Our current PPoR is now and IP, but will be sold to fund the new PPoR. This will be debt free, so there will be a decent supply of equity for more investments.
My no.1 concern has always been cashflow, then cap growth 2nd, minimising debt 3rd. We don't want to be slaves to the properties due to neg cashflows. All out IP's are pos cashflow now. LVR of 56%.
However, we have always tried to maximise all the factors to get the best returns -
1. Location - proximity to amenities; transport, shops, schools etc
2. Rental yield
3. Rental demand
4. Built after 1987 - depreciation
4. Ability to add value
5. Interest only loans
6. 80% loans for safety and saving on LMI.
7. Re-invest all profits (tax returns) into the loans.
8. We pay down our loans as we go to accelerate the equity.
9. Long-term employment prospects for the area
10. Long term cap growth prospects for the area
11. Increasing population to the area.
Going forward, now that the experience has increased and the LVR has decreased, we intend to jump up to the "next level" - smaller sub-divisions with a buy and hold strategy, and purchase a business for extra cashflow.
The business will be a passive management role position for me which will allow us to continue our PAYE jobs and the funds/profits from the business will be reinvested for investing and loan minimising.
I would suggest you apply all the above points to your first IP, and start with the best IP you can afford in an area you have picked.
Good luck, and take action.
Our current PPoR is now and IP, but will be sold to fund the new PPoR. This will be debt free, so there will be a decent supply of equity for more investments.
My no.1 concern has always been cashflow, then cap growth 2nd, minimising debt 3rd. We don't want to be slaves to the properties due to neg cashflows. All out IP's are pos cashflow now. LVR of 56%.
However, we have always tried to maximise all the factors to get the best returns -
1. Location - proximity to amenities; transport, shops, schools etc
2. Rental yield
3. Rental demand
4. Built after 1987 - depreciation
4. Ability to add value
5. Interest only loans
6. 80% loans for safety and saving on LMI.
7. Re-invest all profits (tax returns) into the loans.
8. We pay down our loans as we go to accelerate the equity.
9. Long-term employment prospects for the area
10. Long term cap growth prospects for the area
11. Increasing population to the area.
Going forward, now that the experience has increased and the LVR has decreased, we intend to jump up to the "next level" - smaller sub-divisions with a buy and hold strategy, and purchase a business for extra cashflow.
The business will be a passive management role position for me which will allow us to continue our PAYE jobs and the funds/profits from the business will be reinvested for investing and loan minimising.
I would suggest you apply all the above points to your first IP, and start with the best IP you can afford in an area you have picked.
Good luck, and take action.
Here are three important pieces of advice for you:
1. Buy SOMETHING now...maybe even put a little bit of thought into what, but BUY NOW!
2. Focus on the positives - you will be buying cf-, but think of the CG...mmmm the CG (*drool* Homer style)...
3. Read up on the information yourself..don't be lazy and just ask everything in one post, figure out th answers yourself by being involved here for example...
1. Buy SOMETHING now...maybe even put a little bit of thought into what, but BUY NOW!
2. Focus on the positives - you will be buying cf-, but think of the CG...mmmm the CG (*drool* Homer style)...
3. Read up on the information yourself..don't be lazy and just ask everything in one post, figure out th answers yourself by being involved here for example...
Strategy varies depending on how much I know and what I think is the best approach at the time.
This works fine because with property there is so much variety and so many opportunities to do things differently.
Our first plan was to buy 20 average houses and sell 10 to pay off the other 10 so at the end of the day we would have 10 lots of rent coming in to give us an income of about twice the AUS average.
Now it's all about generating cashflow to show more serviceability to borrow more money to do more projects so we can buy more houses.
Cheers
Quoll
This works fine because with property there is so much variety and so many opportunities to do things differently.
Our first plan was to buy 20 average houses and sell 10 to pay off the other 10 so at the end of the day we would have 10 lots of rent coming in to give us an income of about twice the AUS average.
Now it's all about generating cashflow to show more serviceability to borrow more money to do more projects so we can buy more houses.
Cheers
Quoll
Hey there Rick,
No exit strategy at this stage. I suppose it's strange having a strategy without an exit, but given my age (early 30's) I see myself being in this game for a long, long time. No plans on exiting the game anytime soon and unlike some people I don't quite have a time or dollar figure in mind where, when achieved, will mark the time to exit. But hey, if pressed for an exit strategy right now, I'd have to say sell some assets to pay off debts and live on the yields of the remaining assets!
Like you, no plans to exit the world in a hurry, but I do make sure that if a bus hits me my loved ones will be well taken cared of. Mostly involves the usual things like documentation, insurance, structure, etc. Not sure if that qualifies as an exit strategy though.
Cheers,
e
Just curious kim, will this IP be the first property you have *ever* purchased? Or have you bought a house at some point in the past?
The sheer volume of paper work, archaic drivel and sloooooooowness can be mindboggling and it can throw you the first time. For instance, I had a call yesterday saying "we couldn't book settlement, we've got a tentative booking so it'll probably be OK, but I've been trying to get this booked for weeks. There's nothing wrong, but the CBA doesn't like to settle on a Friday". I mean, really? They've had two months warning on this! I guess I won't be the only one trying to settle on the last Friday of the financial year, too.
The sheer volume of paper work, archaic drivel and sloooooooowness can be mindboggling and it can throw you the first time. For instance, I had a call yesterday saying "we couldn't book settlement, we've got a tentative booking so it'll probably be OK, but I've been trying to get this booked for weeks. There's nothing wrong, but the CBA doesn't like to settle on a Friday". I mean, really? They've had two months warning on this!
I guess I won't be the only one trying to settle on the last Friday of the financial year, too.My strategy is very similar to Jan Somers.....but in the bottom third of the market, ensure a good cashflow, and never sell. So far I have managed to do this....have only sold one.
But some key points in my strategy are:
1. I buy at the cheaper end of the property market and have all of mine currently in Sydney, Melbourne, and Adelaide. Have bought all mine under 200k....the highest I have paid is 190k for 3brm home in SA.
2. Cashflow is very important to me....by reading some of the difficulties people are having with servicing higher rates...I think I made the right decision. Also it allows you to sustain acquiring more properties, stress less, and smell the roses more!
3. Research areas that have infrastructure being put in....some of these areas are not glamorous suburbs but money follows infrastructure and development.
4. I started with units within 14 klms of Sydney but last 6 acquisitions have been houses mostly in Melbourne and Adelaide.
5. Approach property investing like a business....i.e. one of the reasons fail is due to cashflow or working capital! No point buying a bluechip property when you have a 400pw shortfall....you will never get to second base and the stress will get you down. Research shows that less than 5% of RE investors have more than 3 properties.
6. Treat your tenants like customers....but ensure that your rents are increasingly steadily. I have at least 5 tenants who have been with me for over 3 years. Though I do admit I am about $10-$15pw under market on SOME of my properties....these days my properties are getting rent increases every 6 months....usually $10-20pw increases.
7. Stop listening to people who do not have IPs.....they do not know what they are doing.
8. Have a realistic vision on the number of ptoperties or networth you want achieve and thne plan and take action...most people never get there as they procrastinate.
9. Read SS regularly.......some cheeky buggers here....but also some information which is like a diamond in the rough!
10. Ensure that you have fun along the way.....no point being a tight ar$e who does not enjoy life!
That is my 2 cents worth!
But some key points in my strategy are:
1. I buy at the cheaper end of the property market and have all of mine currently in Sydney, Melbourne, and Adelaide. Have bought all mine under 200k....the highest I have paid is 190k for 3brm home in SA.
2. Cashflow is very important to me....by reading some of the difficulties people are having with servicing higher rates...I think I made the right decision. Also it allows you to sustain acquiring more properties, stress less, and smell the roses more!
3. Research areas that have infrastructure being put in....some of these areas are not glamorous suburbs but money follows infrastructure and development.
4. I started with units within 14 klms of Sydney but last 6 acquisitions have been houses mostly in Melbourne and Adelaide.
5. Approach property investing like a business....i.e. one of the reasons fail is due to cashflow or working capital! No point buying a bluechip property when you have a 400pw shortfall....you will never get to second base and the stress will get you down. Research shows that less than 5% of RE investors have more than 3 properties.
6. Treat your tenants like customers....but ensure that your rents are increasingly steadily. I have at least 5 tenants who have been with me for over 3 years. Though I do admit I am about $10-$15pw under market on SOME of my properties....these days my properties are getting rent increases every 6 months....usually $10-20pw increases.
7. Stop listening to people who do not have IPs.....they do not know what they are doing.
8. Have a realistic vision on the number of ptoperties or networth you want achieve and thne plan and take action...most people never get there as they procrastinate.
9. Read SS regularly....
...some cheeky buggers here....but also some information which is like a diamond in the rough!10. Ensure that you have fun along the way.....no point being a tight ar$e who does not enjoy life!
That is my 2 cents worth!
Sash, I agree totally with all of your points.
I manage my cashflow very well and do cashflow projections at the beginning of each month. That's the only way to run a business and this IS a business.
I'm a few bucks under market on some of my properties, too. However, these people tend to stay long term. My longest has been with me over 7 years!
If you lose a tenent and face 2 weeks downtime looking for a new one, then that equates to your $10-$15 per week anyway. I'd rather have the continuity than the extra few bucks each week.
I manage my cashflow very well and do cashflow projections at the beginning of each month. That's the only way to run a business and this IS a business.
I'm a few bucks under market on some of my properties, too. However, these people tend to stay long term. My longest has been with me over 7 years!
If you lose a tenent and face 2 weeks downtime looking for a new one, then that equates to your $10-$15 per week anyway. I'd rather have the continuity than the extra few bucks each week.
Hi LAA,
I really like your strategy, but I am trying to reconcile in my mind point 5, with points 7 & 8 from your list below:
I understand why some people prefer to pay P&I while others (inc myself) always pay IO to maximise cashflow. So you do this Interest Only, but then you pay down the loan principle with your tax return??
Just trying to understand the reasoning, ie. why not pay P&I on all/some loans from the outset, or use your ITWV cashflow to service more loans/assets?
Is it just a case of maintaining flexibility in your decisions?
Sorry for all the Q's
Chris
I really like your strategy, but I am trying to reconcile in my mind point 5, with points 7 & 8 from your list below:
I understand why some people prefer to pay P&I while others (inc myself) always pay IO to maximise cashflow. So you do this Interest Only, but then you pay down the loan principle with your tax return??
Just trying to understand the reasoning, ie. why not pay P&I on all/some loans from the outset, or use your ITWV cashflow to service more loans/assets?
Is it just a case of maintaining flexibility in your decisions?
Sorry for all the Q's
Chris
I hear you Y man. Too many IPs, too many headaches. Sell all IPs, buy a distressed sale around $2M, spend $500k wait 5 years and sell for $5M. Too easy. Not all IPs will double in 7-10 years where things are at the moment, the ones that have a remote chance of doubling will only give you sub 5% yield. Not a game for the feint hearted.
gees asdf... can't believe your change of tune over the last 12 months or so from build'n'die to this! have you become a trader now?? if so, welcome to the dark side!
1. What is your experience so far with ip?
We've just bought our first one off the plan. It's expected to be completed in June next year.
How many ip's do you own?
one
How often do you accumulate a new ip
We don't know as yet, but figure we'll see when our LVR goes down to 50 or 60%
2. What type of property do you buy and what is your reasoning?
(unit, apartment townhouse, villa, duplex, house)
unbiased. Although we've gone for an aprartment now, I would like to build houses too.
3. New or Old - And the reason behind your choice.
Brand New for depreciation and also better quality tenant, charge more rent as it'll be in higher demand then an older property.
4. If Capital Growth is the most important factor in choosing an ip do you focus on buying proven performing suburbs with a past history of good cg i.e. inner city? or research the up-coming hot spots?
Research the up and coming hot spots
5. If positive cash flow is important to you. What % capital growth are you hoping to receive?
not important
6. What type - buy and hold, flips, wraps, development, reno?
Build and Hold
7. What advice would you give a newbie who is confused about all the options and strategies out there?
I know it's confusing but you must start somewhere.
9. What is your exit strategy?
I see no reason to exit
We've just bought our first one off the plan. It's expected to be completed in June next year.
How many ip's do you own?
one
How often do you accumulate a new ip
We don't know as yet, but figure we'll see when our LVR goes down to 50 or 60%
2. What type of property do you buy and what is your reasoning?
(unit, apartment townhouse, villa, duplex, house)
unbiased. Although we've gone for an aprartment now, I would like to build houses too.
3. New or Old - And the reason behind your choice.
Brand New for depreciation and also better quality tenant, charge more rent as it'll be in higher demand then an older property.
4. If Capital Growth is the most important factor in choosing an ip do you focus on buying proven performing suburbs with a past history of good cg i.e. inner city? or research the up-coming hot spots?
Research the up and coming hot spots
5. If positive cash flow is important to you. What % capital growth are you hoping to receive?
not important
6. What type - buy and hold, flips, wraps, development, reno?
Build and Hold
7. What advice would you give a newbie who is confused about all the options and strategies out there?
I know it's confusing but you must start somewhere.
9. What is your exit strategy?
I see no reason to exit
Signing off on the first IP in the next few business days
While a lot of people advocate buying less expensive properties for the better yields, a lot also get tired of the headaches of too many IP's, so our strategy is somewhere in between.
We plan to buy between 4 - 6 moderately priced IP's (generally homettes) over the next 20 years, rent as many of them as possible to my kids and parents, get good tenants for the others and aim to sell the PPOR at retirement, while moving into our favourite IP ourselves. So use the funds from the PPOR to pay off the loans on the IP's.
So basically loans on IPs = value of PPOR.
I've put together a spreadsheet snapshotting our financial position now, in 5 years, in 10 years, in 15 years, in 20 years before retirement and 20 years after retirement so I know what numbers I want to achieve (roughly), now its just a matter of turning them from virtual to real figures...
If we find that we cant keep loan on IP's = PPOR theres 2 choices, pay some off the loans or improve the value of the PPOR, the latter sounds like more fun but its early days yet.
While a lot of people advocate buying less expensive properties for the better yields, a lot also get tired of the headaches of too many IP's, so our strategy is somewhere in between.
We plan to buy between 4 - 6 moderately priced IP's (generally homettes) over the next 20 years, rent as many of them as possible to my kids and parents, get good tenants for the others and aim to sell the PPOR at retirement, while moving into our favourite IP ourselves. So use the funds from the PPOR to pay off the loans on the IP's.
So basically loans on IPs = value of PPOR.
I've put together a spreadsheet snapshotting our financial position now, in 5 years, in 10 years, in 15 years, in 20 years before retirement and 20 years after retirement so I know what numbers I want to achieve (roughly), now its just a matter of turning them from virtual to real figures...
If we find that we cant keep loan on IP's = PPOR theres 2 choices, pay some off the loans or improve the value of the PPOR, the latter sounds like more fun but its early days yet.
Family members of mine have done this.
Several years ago moved from a house in the Strathfield area of Sydney to a 3 bedroom sub-penthouse unit in North Sydney (Milsons Point)with 180deg sweeping views of the harbour. Been there for 10 years and probably quadrupled in value, we're talking $8-$10mil mark.
Mind you, he's an investment banker for the 'millionaire factory' Macquarie Bank. So the holding costs (if any) over the 10 years wouldn't have been a problem.
Desperate times desperate measures. Not quite having to trade just yet but will have my finger on the sell trigger if things go pear shape with this credit market. Don't need to end up in the headlines with guys like Craig McDermott though I wouldn't suggest what I'm doing is property development...
So for now, still in the wither away and die camp. Maybe a retrenchment might change all that.
To buy or not to buy - Michael Yardney
Here is an interesting excerpt from Michael Yardneys website.
Now this doesn't necessarily mean you must buy a house because of its underlying land value.
In the established, densely populated inner suburbs of our capital cities, apartments and townhouses make great investments. Because there is no vacant land in these areas and town planning regulations make it more difficult and, importantly, considerably more expensive to build new apartments, the capital growth of apartments and townhouses is similar to houses.These units take on a proportionate value of the land that the whole complex sits on.
To those of you have bought apartments in the inner city how have you done re: your capital growth?
I have also read that if you buy an apartment or unit, you should
1. Buy in a small complex, not high rise
2. Dont buy where there is likely to be future redevelopment - new units built because there will be an oversupply.
Im in Perth, a govt employee (not for too much longer) earning the average wage and personally have a Multi $Million Property Portfolio spread around Australia.
This is a post that describes my investment strategy involving Villas & Townhouses. It may be of interest to you.
The capital growth averaging (CGA) strategy I employ utilises a regular purchasing cycle similar to what Dollar Cost Averaging is to the sharemarket. The major underlying principle to its success is it relies on your "time in" the market, NOT "timing" the market, and never never sell.
So in other words it does not matter whether you buy at the top of a boom or at the bottom, just so long as you purchase good quality, well located property in high density areas (metro area capital cities), at or below fair market value, on a regular basis. I've been purchasing an IP per annum and we're currently 8 years into this 10 year plan.
I've been purchasing new or near new property over older style property for several reasons. The main ones being (in no particular order) -
1/ To maximise my Non-Cash depreciation deductions
2/ To minimise my maintenance & repair costs
3/ More modern & Attractive to tenants - thereby minimising potential vacancy rates
4/ Ask a higher rent - thereby Maximising yields
Without getting into the "which is better debate, houses or Units??", I prefer to purchase Townhouses & Villas with a 30% or greater land component thereby eliminating multi story units or high rise apartments, for several reasons.
The mains ones being (in no particular order) -
1/ lower maintenance & upkeep for the tenant
2/ lower purchase or entry level into a Higher capital growth suburb area
3/ a rapidly growing marketplace (starting both now & into the future) wanting these type properties. This is due the largest group of people to ever be born (being the Baby boomers and Empty nesters) starting to come into their retirement years. They will be wanting to downsize for the following main reasons - lifestyle & economic.
4/ greater tax advantages & effectiveness thus maximises cashflow.
5/ able to hold more individual properties spread across your portfolio - thereby minimising area over exposure risks by not holding all your eggs in only a few baskets, so to speak
I look to buy in areas with a historic Cap growth of 7%pa and/or are under gentrification. I look to where the Govt, Commercial, Retail, private sectors are injecting money. This ultimately beautifies the area which attracts people so they move in creating demand. I have found this works extremely well if you are looking for short to medium term capital growth so as to leverage against and build your portfolio faster.
Getting back to CGA, as the name suggests it averages out the capital growth achieved on individual properties with your portfolio throughout an entire property cycle, taking into account that property doubles in value every 7-10 years - thats 7%pa compounding.
The easiest way to explain what Im meaning by this is to provide a basic example taking into account that all your portfolio cash flow will be serviced via Wages in the accumulation stage, Rental income, the Tax man, an LOC and/or Cash bond structure, and any other form of disposable income.
For ease of calculation lets say we buy a property for $250k, so in 10 years time its now worth $500k. Now lets say we do that every year for the next 7-10 years. Now you can quit the rat race.
So in year 11 (10 years since your 1st Ip) you have 250K equity in IP1 you can redraw out (up to 80%) Tax free to fund your lifestyle or invest with.
In year 12 you do exactly the same but instead of drawing it from IP1 you draw it from IP2.
In year 13 you do the same to IP3, in year 14 to IP4, etc etc etc. You systematically go right through each property within your portfolio year by year until you have redrawn from each property once.
So what do you do after that I hear you say ?? hmmm......well thats where it all falls into a deep hole.
You have to go get a JOB.......... nope only joking!
You simply go back to that first IP you purchased as its been 10 years since you drew upon it first time around and its now doubled in value ($1M) yet again. So you complete the entire cycle once again. In fact chances are you never drew each property up 80% lvr maximum. So not only have you now got an entire property cycle of growth to spend you, you still have what you left undrawn in it first time round that's compounded big time. Now your wealth is compounding faster than you can spend it! What a problem to have!!
Getting back to what I said in my opening paragraph - it does not matter where you buy within a property cycle, just so long as you do buy. This is because you will not be wanting to redraw upon it until 10 years later after its achieved a complete cycle of growth.
Well thats the Basic Big Picture of CGA. Once its set up its a self perpetuating, TAX FREE Income Money Machine.
I hope this helps.
This is a post that describes my investment strategy involving Villas & Townhouses. It may be of interest to you.
The capital growth averaging (CGA) strategy I employ utilises a regular purchasing cycle similar to what Dollar Cost Averaging is to the sharemarket. The major underlying principle to its success is it relies on your "time in" the market, NOT "timing" the market, and never never sell.
So in other words it does not matter whether you buy at the top of a boom or at the bottom, just so long as you purchase good quality, well located property in high density areas (metro area capital cities), at or below fair market value, on a regular basis. I've been purchasing an IP per annum and we're currently 8 years into this 10 year plan.
I've been purchasing new or near new property over older style property for several reasons. The main ones being (in no particular order) -
1/ To maximise my Non-Cash depreciation deductions
2/ To minimise my maintenance & repair costs
3/ More modern & Attractive to tenants - thereby minimising potential vacancy rates
4/ Ask a higher rent - thereby Maximising yields
Without getting into the "which is better debate, houses or Units??", I prefer to purchase Townhouses & Villas with a 30% or greater land component thereby eliminating multi story units or high rise apartments, for several reasons.
The mains ones being (in no particular order) -
1/ lower maintenance & upkeep for the tenant
2/ lower purchase or entry level into a Higher capital growth suburb area
3/ a rapidly growing marketplace (starting both now & into the future) wanting these type properties. This is due the largest group of people to ever be born (being the Baby boomers and Empty nesters) starting to come into their retirement years. They will be wanting to downsize for the following main reasons - lifestyle & economic.
4/ greater tax advantages & effectiveness thus maximises cashflow.
5/ able to hold more individual properties spread across your portfolio - thereby minimising area over exposure risks by not holding all your eggs in only a few baskets, so to speak
I look to buy in areas with a historic Cap growth of 7%pa and/or are under gentrification. I look to where the Govt, Commercial, Retail, private sectors are injecting money. This ultimately beautifies the area which attracts people so they move in creating demand. I have found this works extremely well if you are looking for short to medium term capital growth so as to leverage against and build your portfolio faster.
Getting back to CGA, as the name suggests it averages out the capital growth achieved on individual properties with your portfolio throughout an entire property cycle, taking into account that property doubles in value every 7-10 years - thats 7%pa compounding.
The easiest way to explain what Im meaning by this is to provide a basic example taking into account that all your portfolio cash flow will be serviced via Wages in the accumulation stage, Rental income, the Tax man, an LOC and/or Cash bond structure, and any other form of disposable income.
For ease of calculation lets say we buy a property for $250k, so in 10 years time its now worth $500k. Now lets say we do that every year for the next 7-10 years. Now you can quit the rat race.
So in year 11 (10 years since your 1st Ip) you have 250K equity in IP1 you can redraw out (up to 80%) Tax free to fund your lifestyle or invest with.
In year 12 you do exactly the same but instead of drawing it from IP1 you draw it from IP2.
In year 13 you do the same to IP3, in year 14 to IP4, etc etc etc. You systematically go right through each property within your portfolio year by year until you have redrawn from each property once.
So what do you do after that I hear you say ?? hmmm......well thats where it all falls into a deep hole.
You have to go get a JOB.......... nope only joking!
You simply go back to that first IP you purchased as its been 10 years since you drew upon it first time around and its now doubled in value ($1M) yet again. So you complete the entire cycle once again. In fact chances are you never drew each property up 80% lvr maximum. So not only have you now got an entire property cycle of growth to spend you, you still have what you left undrawn in it first time round that's compounded big time. Now your wealth is compounding faster than you can spend it! What a problem to have!!
Getting back to what I said in my opening paragraph - it does not matter where you buy within a property cycle, just so long as you do buy. This is because you will not be wanting to redraw upon it until 10 years later after its achieved a complete cycle of growth.
Well thats the Basic Big Picture of CGA. Once its set up its a self perpetuating, TAX FREE Income Money Machine.
I hope this helps.
Wicked plan Rixter!
One question, when you draw down the equity, you cannot then claim that extra amount you have drawn from the property as a tax deduction as it has not been used for investment purposes... is that right?
So from the $250k mortgage, in 10 years when you draw $250k equity, you can still only claim $250k mortgage as an expense.
Thanks for clarifying!
One question, when you draw down the equity, you cannot then claim that extra amount you have drawn from the property as a tax deduction as it has not been used for investment purposes... is that right?
So from the $250k mortgage, in 10 years when you draw $250k equity, you can still only claim $250k mortgage as an expense.
Thanks for clarifying!
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