Strategy advice

[JT87]

Hi everyone,

Thought it's time i better put my hand up for some advice, I have looked at joining investment property mentoring company's (PRE) and decided I would rather learn and do things on my own, I'm reading books and scanning this forum most nights.

I am 27 years old and I currently have 2 IP's

One in port stephens loan amount is 240k value 310
Another in Logan, loan is also 240 and value 310
Earning 90k a year.

I have 85k saved up and am considering a third propert in Logan.
Finance has advised I would be able to borrow 500k.
Now I read it over and over again how important planning and strategy is, my end goal is to create a income of 100k in the next 10 years.
How do I go about planning a strategy to get me to this goal which defines what sort of property I should be looking for next? CF or CG?

I know I am not a guru and I am prepared to seek advice from professionals and continue researching until I feel confident that my next purchase will be wise.

I do enjoy searching for, inspecting and negotiating deals myself, I just want to ensure that I have planned a suitable strategy and not very sure how to do this.

Thanks
(prepared for a grilling)

 

[Cash Flows]

Hi JT 87

Congrats on your achievements far.

What sort of rent are you achieving for your two IP's?

Best thing to do would be to work backwards and work out how many properties you need unencumbered to generate $100k income pa.

RE your CF v CG debate, I would consider a combination of both. It SEEMS as though you have strong servicing capabilities so it might be time to add a property with strong CG potential.

You are well on your way, keep it up!

Cheers

Cash Flows

 

[strongy1986]

Hi everyone,

Thought it's time i better put my hand up for some advice, I have looked at joining investment property mentoring company's (PRE) and decided I would rather learn and do things on my own, I'm reading books and scanning this forum most nights.

I am 27 years old and I currently have 2 IP's

One in port stephens loan amount is 240k value 310
Another in Logan, loan is also 240 and value 310
Earning 90k a year.

I have 85k saved up and am considering a third propert in Logan.
Finance has advised I would be able to borrow 500k.
Now I read it over and over again how important planning and strategy is, my end goal is to create a income of 100k in the next 10 years.
How do I go about planning a strategy to get me to this goal which defines what sort of property I should be looking for next? CF or CG?

I know I am not a guru and I am prepared to seek advice from professionals and continue researching until I feel confident that my next purchase will be wise.

I do enjoy searching for, inspecting and negotiating deals myself, I just want to ensure that I have planned a suitable strategy and not very sure how to do this.

Thanks
(prepared for a grilling)

Talk to a good finance broker

For 100k income you will probably need 150k in rent coming in

That's not too hard to achieve- you could do that owning 6 - 10 properties
To own 6 - 10 properties you either need to be really frugal or have a few cash flow neutral properties thrown in there

Next step is how to get rid of the debt so you actually have the income? You'll probably have around 2.5 in debt to get rid of

Not an easy task just paying it down with your salary and not achievable in 10 years

So you either need to look at doubling your investing and selling half of them (10 properties) to pay off debt - problem here is are relying on growth (I don't like this)
Or you need to wise up - rennos, subdivide, develop, dual occ

I would dare say the only investors who will make their passive income goals in these times with a buy and hold strategy are those with serious incomes

If your an average joe then you will never get there in 10 years unless you think outside the square

 

[JT87]

Thanks for your reply.

Port Stephens is only 320pw, this was a PPOR turned IP
Logan is 360pw (6.0%) bought this one for CG potential
I want to just buy and hold for now, fairly happy with my recent Logan purchase and leaning towards going for a very similar deal again this time around. Had a very helpful agent and they are a great property management team.

Just want to avoid running into servicabilty issues down the track.

 

[Jess Peletier]

Depending on your goals and risk tolerance, you have equity there that you may be able to draw to really fast track your next couple of purchases if you're willing to go into LMI territory.

Whether it's worth it will depend on the price of the new IP's, the cashflow they generate and where your sleep at night factor lies. You'll need to run a few numbers.

Also coming into consideration is whether you want to buy a PPOR at some stage, as you'll want to save your cash for that if it's on the cards, which means utilising the LMI on your IP's makes more sense.

There are heaps of great brokers on here who will help you map things out based on your goals Good luck!

 

[MIW]

Strategy and mindset help!

So you either need to look at doubling your investing and selling half of them (10 properties) to pay off debt - problem here is are relying on growth (I don't like this)
Or you need to wise up - rennos, subdivide, develop, dual occ

I would dare say the only investors who will make their passive income goals in these times with a buy and hold strategy are those with serious incomes

If your an average joe then you will never get there in 10 years unless you think outside the square

Most serious IP investors understand and rely on growth, most that made money are in it for the long term....and rely on CG!
Also, I was an average joe, self-employed not on serious income, yet amassed most portfolio in 7 years. So the market and time dictates the outcome not being average joe..

All I wish to point out, is that it is possible but number of factors play a role, a strategy and positive mindset help!
As you said, work out the $ amount you need to generate the income (after tax you wish). Then work out the strategy you wish to get there, the no. of IPs required, this will depend on future market forces though... Keep adjusting as times goes by and keep learning and educating yourself!

 

[strongy1986]

Most serious IP investors understand and rely on growth, most that made money are in it for the long term....and rely on CG!
Also, I was an average joe, self-employed not on serious income, yet amassed most portfolio in 7 years. So the market and time dictates the outcome not being average joe..

All I wish to point out, is that it is possible but number of factors play a role, a strategy and positive mindset help!
As you said, work out the $ amount you need to generate the income (after tax you wish). Then work out the strategy you wish to get there, the no. of IPs required, this will depend on future market forces though... Keep adjusting as times goes by and keep learning and educating yourself!

Don't get me wrong, I still try to buy in areas I think will have good growth but I'm nowhere near as bullish as most on here. Our property market is already fairly expensive thanks to big wage increases and easy credit policies in the last 15 - 20 years. So really I'm not sure if the ride will continue that's why I will base my strategy on value add because it's something I can control to an extent

Also the op said 10 year passive income of 100k - he's on 90k a year
Impossible on a buy and hold strategy in 2015 - unless property in AUS more than doubles in the next ten years
History is just history

 

[hugh72]

Pretty tough to achieve 100k net passive income in 10 years on 90k with buy and hold even if you are very very aggressive and have some luck IMO. Not saying it cannot be done starting out now but it would be difficult without a much higher income. Better to aim high though
20 years?.. Different story

 

[JT87]

Thanks for the input everyone,
Yeah I'm an average joe but we all start this way and Ide like to think that the deals I make in the later years will be much better than what I start with as I'll be learning a lot along the way.
and im definitely open to renos, dual occ's down the track once things are going smoothly.
Port Stephens is 1094m2 this was purchased with a subdivision or grannyflat in mind, just don't think it's worth doing much there ATM.

I understand some people saying its in achievable but you've got to set goals right? and I can always adjust the bar, I'm hardly going to be shattered or call it quits should I fall short.

So I suppose my question is, at this stage is my best option is to look for another neutral to positive property showing good capital gain potential.
Or is it time that I start adding some high yield properties to help with savings and avoid potential serviceability issues?
I've heard some people having a 50/50 mix but figure this is mainly to bring a negatively geared portfolio back to balance and that the real profit is made in capital growth.

 

[strongy1986]

Thanks for the input everyone,
Yeah I'm an average joe but we all start this way and Ide like to think that the deals I make in the later years will be much better than what I start with as I'll be learning a lot along the way.
and im definitely open to renos, dual occ's down the track once things are going smoothly.
Port Stephens is 1094m2 this was purchased with a subdivision or grannyflat in mind, just don't think it's worth doing much there ATM.

I understand some people saying its in achievable but you've got to set goals right? and I can always adjust the bar, I'm hardly going to be shattered or call it quits should I fall short.

So I suppose my question is, at this stage is my best option is to look for another neutral to positive property showing good capital gain potential.
Or is it time that I start adding some high yield properties to help with savings and avoid potential serviceability issues?
I've heard some people having a 50/50 mix but figure this is mainly to bring a negatively geared portfolio back to balance and that the real profit is made in capital growth.

Yes many will say the real profit is made in capital growth

And there's nothing wrong with cash flow neutral/ positive - if someone else can pay off a couple of mill in debts fir you over 25 years then why would you care about growth!

Well what's your out of pockets??

What are you comfortable being out of pocket by a week

Once you answer this you will know what to buy

Another thing I try to remind myself - there's a profit to be made in every market

 

[MIW]

Also the op said 10 year passive income of 100k - he's on 90k a year
Impossible on a buy and hold strategy in 2015 - unless property in AUS more than doubles in the next ten years
History is just history

Why is it impossible, nobody has a crystal ball into the future, but it may be happen it may be prossible and I agree with you that history is just that, so we need to live in present, plan ahead and learn from history.
Of course one needs to change and adapt with times and adversity, so adding renovations to the equation is one part of the step, as there are number of ways in increasing equity or cash-flow. What I emphasize is that market forces will dictate the results as there are various risks involved whether with or without our control....

 

[Daviid]

Capital growth, capital growth, capital growth....

Getting slightly positive to neutral yields but targeting capital growth is how to get the income you want.

Amass as many as your cashflows will allow but target areas where you're more chance of capital growth. You don't need the whole portfolio to double in 10 years, it may only go 50% but you can use that growth to sell down enough of the portfolio to pay mortgages off on the balance. Then the rent is debt free.

Don't target positive cashflow properties that have lower chances of capital growth. The capital growth is where you grow your wealth.

 

[Adelaide]

Here is a snapshot of my experience from investing. Possibly a view of what not to do but better than doing nothing.

Bought my first home in 2000 in Townsville for $150,000.
Turned it into IP in 2004.
By 2008 the value was $390,000 (I pulled equity out and that was the valuation) and the rent was 380pw.
2015, its worth around $350,000 and rent is $350 pw.
Sure the original debt is CF #.
I pulled money out and discovered you can lose money in the share market so now $5,000 negative per year.
Loan now $324,000.

If property was tied in with another property (so crossed), I might not be able to pull cash out or sell the other one without dumping a heap of money into this one.
As a matter of interest, Insurance is $2500 and rates $1680 per 6months.

Pulled equity out of Townsville house (I never cross collateralise) and bought IP (townhouse in 2004) in Townsville. Bought for $110,000. 2008 valued at $250,000. Lucky to sell it for $200,000 now. Rents $250 pw (was $275 pw last year). Matter of interest - Insurance on home contents is $200 per week which gives me PL insurance, Body corp is $2,500 py, Rates $1400 per six months. Same story as the first house. Yep played in shares a lot and lost. So loan now $209,000. Good thing it's not crossed with another house.
Negative with all debt is around $5,000 per annum.

Neither of these properties will have much capital growth in the next few years so if I don't sell, it's going to cost me every year and then I need to consider the opportunity cost.

2006 I bought in Brisbane. Last decade was immense growth in property and I rode it up with a bit of reno along the way. Bought for $260,000. Rented it out. GFC hit. I panicked and sold it for $371,000 in 2008. No tenant and took 6 months to sell. Had spare money out of it so paid down some debt.
Regret the sale.

2008, bought house in East Geelong for $280,000. Loan $251,000. Now valued at $350,000 and rent is $300 pw. (dropped it $20pw this year so I could get people in).

From 2008, interest rates were high. I'm single and did all this on an average single wage and when the rates were high, it hurt my lifestyle.

I took up housesitting (saves on rent and electricity etc). Turns out I love the game and I have repeat customers who are now friends. Overseas holidays were put on hold till 2012 when I could afford it again.

2014, I bought IP in Armadale (pulled equity from Geelong and put new property in company and trust structure). 4 bedroom. Bought $280,000. Spent $20,000 renovating. Rent $420 per week. Managing it myself so saving $4000 on management fees. Thats around how positive it is. I also love the self managing game. Want more of that.

Overall, when I look at the picture, regardless of how I used the equity redraw, I have 2 negaitive properties (and not in areas where there will be great capital growth) and 2 positive properties. Overall, about $10,000 negative which I can handle fine now but at one point, it was around $30,000 and my wage was only double that.

So I have discovered that putting money into IPs can get hard when there are no spare dollars in the coffe jar and the properties are negative. Lifestyle is impacted.

Seems to be that as prices go up, rents go up and as prices drop, so can rents. Not good to be caught short with a large loan.

I'm happy with positive CF now. And understand how developing a property can move the property portfolio forward faster.

So for me, I'm trying to concentrate on finding a positive property that I can subdivide and build on (with an LVR of around 90%). It's tempting to just buy another house and get the rent rolling in. However, without the potential to develop it (either now or in 10 years time), I have no other opportunites to increase it's value. And then I need to rely on saving my own dollars before I get going again.

It's slower than wisely using negative geared properties for sure. For my single female perspective though, it's safer for me, from a financial point of view.

Your strategy really depends on your income, your expenses and how much your lifestyle costs. Property goes up and down. Play defense well so you don't have to sell in a hurry and lose money. Be proactive in hunting down the best property for your plan. Enjoy the process.

Negative properties in great capital growth areas and positive geared properties are both fabulous - as long as you handle the cash well.

Good luck.

 

[RetireRich101]

accumulate another 3 more Logan/Port Stephens property by 2016.
build granny flat on all your 5 properties by 2018.
property acquisition complete by 2018.
do nothing for 10 years.
2028 ( you're now 41) revisit your portfolio.

Too many assumption in the strategy:

• your dual income properties will service the loan even 6-8% interest rate hike, because you're getting 8-9% return on the dual income properties.
• You're going aggressive borrowing over 80% LVR at the initial acquisition.
• excessive income from dual income will go into offset/principle of your IP
• your frugal saving plus increased salary would pay some principle
• 10-12 years holding those 6 properties is either doubled or 80% increase.
• your LVR in 2028 is about 20-30%
• your rental for the dual income in 2028 is $800 each giving a total $200k annual income
• minus 20-30% loan, would hopefully arrive at $150k.