Strategy advice please

[BestWeInvest]

Hi everyone, I am new to somersoft and would appreciate some advice for my next steps regarding IPs. My ultimate goal is generate a passive income through property. However for the shorter term I'm interested in buying property to increase my wealth.

In August last year with the use of a buyers agent I purchased my first property in Morley WA. I bought a 1971 built 3x1 on a sub dividable block. Purchase price was $490K and I have an interest only offset mortgage of $430K.

I work in the mining industry as a FIFO construction Electrician. I have a very good income and am working hard now to secure a strong financial future.

The LVR on my PPOR in Morley is 85% and I am at the early stages of a deposit for my next purchase.
Buying a sub dividable property gives me more options but it has also has left me unsure as to what should be my next move. I would like to use a buyers agent again to make a similar purchase in Perth but am not sure if I should first subdivide my PPOR.
Before my first purchase I saw a property accountant and we ran the maths of both my first purchase and possible second of an identical IP. It would cost me $9K annually to keep the IP. I know that if i were to buy 3 sub dividable places it would be expensive to hold them and rather stressful.

At the moment Im leaning towards purchasing another sub dividable property this year first and then either splitting my PPOR or the IP. From there I think it would be easiest to sell off one of the divided blocks to enable me to buy a third and repeat this process while I work away.

Please share your advice and similar experiences with me.
Andrew

 

[Rolf Latham]

Hi Andrew

If you can take a profit early by splitting off the land , do so, unless your accounting advice says otherwise.

It will help you leap frog and maybe get you into a better opportunity earlier.

In addition, being able to hold cash back will make you feel more comfy

ta
rolf

 

[Kent Cliffe]

Hi Andrew

Firstly, welcome to the community! It is a little hard to give you advice as I don't know you complete situation, but I can give you some ideas as to what some my other clients have done in similar situations.

The first thing I noticed is that your LVR is 85%, which means depending on the lender you paid mortgage insurance. I had a client in a similar situation that had an LVR around 90%. When looking at his purchase, it was hard to justify subdividing one year after paying mortgage insurance of approximately $10,000. This client still had a capacity to purchase again and was comfortable with a high gearing level of debt. To maximize their gearing and minimise their mortgage insurance cost over the life of the loan, they ended up purchasing again with the intention of subdividing in 3 to 5 years as their capacity service more debt reduces. Longer term, they will subdivide and sell the vacant blocks, while keeping the existing dwelling, and using the proceeds of sale to cosmetically renovate the existing dwelling. Once this is complete, they plan to revalue AND/OR use the left over proceeds of sale to commence the process again.

Advantages of this strategy:

• Development sites historically tend to have better capital growth.
• Through subdivision and renovation you can manufacture equity faster than normal capital growth.
• Buy holding and setting up the correct tax structures, you can reduce the capital gains tax on the blocks to half of your marginal tax rate. Developers who trade would be paying the fully CGT rate (30% in company structure).
• Through splitting the block and renovating you would be boosting your rental yield and reducing your holding costs. This will make it easier to hold multiple properties further down the track.
• Your land component value remains higher buy holding and renovating existing dwelling, rather than holding the new finished product.
• You can subdivide the property with often less capital needed to construct a whole new dwelling.

Disadvantages of strategy:

• The initial two properties will be the hardest in your portfolio to hold, up until you subdivide and boost your yield.
• Their is less tax incentives by holding older properties.
• This strategy often works best with people on higher wages that can support the debt.
• Their is a lot more maintenance and older properties, and this strategy is a lot more involved than your average set and forget purchase.

Another strategy I have also suggested to client in a similar situation to yourself is to blended their portfolio. This is simply just purchasing one development site and then purchasing an easy care villa with a strong rental yield.

Advantages of the strategy:

• Higher tax deductions as the portfolio is blended with newer and old properties.
• Rental yield tends to be more consistent and higher, as you are only holding 50% of your portfolio in development sites.
• Lower maintenance and less involvement.

Disadvantages of strategy:

• Lower capital growth.
• Less ability to add-value.

This lists is not complete and I'm sure there are plenty more strategies. However, I hope this gives you some insight and helps make your direction little bit more clearer.

 

[MTR]

Hi everyone, I am new to somersoft and would appreciate some advice for my next steps regarding IPs. My ultimate goal is generate a passive income through property. However for the shorter term I'm interested in buying property to increase my wealth.

In August last year with the use of a buyers agent I purchased my first property in Morley WA. I bought a 1971 built 3x1 on a sub dividable block. Purchase price was $490K and I have an interest only offset mortgage of $430K.

I work in the mining industry as a FIFO construction Electrician. I have a very good income and am working hard now to secure a strong financial future.

The LVR on my PPOR in Morley is 85% and I am at the early stages of a deposit for my next purchase.
Buying a sub dividable property gives me more options but it has also has left me unsure as to what should be my next move. I would like to use a buyers agent again to make a similar purchase in Perth but am not sure if I should first subdivide my PPOR.
Before my first purchase I saw a property accountant and we ran the maths of both my first purchase and possible second of an identical IP. It would cost me $9K annually to keep the IP. I know that if i were to buy 3 sub dividable places it would be expensive to hold them and rather stressful.

At the moment Im leaning towards purchasing another sub dividable property this year first and then either splitting my PPOR or the IP. From there I think it would be easiest to sell off one of the divided blocks to enable me to buy a third e repeat this process while I work away.

Please share your advice and similar experiences with me.
D


Hi Andrew
Welcome to SS.

First thing I noticed was the purchase price of your property in Morley, seems cheap for subdividable block? I would find out what it is worth today, perhaps you could access equity from this moving forward.

In your situation the first step I would take is to get accurate costings on subdividing and building at rear, this can be a very good strategy, and the goal would be to access equity from the rear property and end up with casflow to cover your next buy.

Also look at the post in adding value - Backyard subdivision
Aaron S may also be able to help.

Cheers
MTR

 

[HD_ACE]

Hello andrew

This is the strategy im currently using. Having bought a retain and build in morley also 8 months ago and another retain and build in perth just before xmas.
This one i plan to subdivide, build and hold with in the year because the numbers work, then use the equity to buy again. My morley one will be a bit more long term.

It all depends how you want to go about it. If you think theres going to be some good growth in perth then you would be better off buying another subdividable ip and landbanking. Then the deals are far more profitable when you choose to develop.

Then your choice would be to develop ppor or ip which could just come down to the one with most profit or how long you plan on having it as your ppor and if you mind having a backyard or someonelse there building.

Some food for thought.

Cheers

 

[Andrew_A]

Might help if you run the numbers and scenarios again if you haven't done so since purchasing, can then post them on here in a general fashion (no need for address details) for some feedback.

 

[Rixter]

My ultimate goal is generate a passive income through property.

You need to be specific, allot a time period for when you want it by, and what this will achieve for you. so.......

What is your exact passive income amount figure you require?

What is the exact date you want it by?

Why do you emotionally want it?

Once you know the answers to those questions then you devise your plan to attaining it in the time you need it by.. no good buying a shopping car if you're planning to take 5 days to drive interstate on a family holiday.

I hope this helps and provides some food for thought.