The 'Bones' of the game

[Rondofj]

Heya all,

Been lurking on here a bit and owe you guys a great deal for the learning resources!
Sydney based 37/m, no properties yet, work as an architect/crappy industry as we are in n out of jobs every now n then. Savings up to 400k. Salary between jobs 85-110k

Have come up with a very rough sketchy plan, trying to build the bones of the system that will get me some financial freedom hopefully.

Plan/ Goals -

*want a net rolling rental income after all expenses paid of say 60-70k/year ...for now
*want to invest in brisbane/central coast/wollongong (think I will move to Brisbane eventually, Sydney sucks). Open to any other areas around these
*good cashflow but also potential for good CG, mixed bag. Cant have both high I know.
*buy below market - distressed sales/deceased estate/mortgagee sales etc
*take small baby steps, IP1 maybe 250-300k, use 80% loan. Is this ok?
*Dunno what type of property-unit/duplex/townhouse/?? Please suggest
*Never sell, use equity to buy other IPs
*Max 5 properties in lifetime I think, else management is too hard, things all over the shop.
*Live overseas on rental income. Fiji longterm, try few yrs in Thailand, Carribean, Brazil?
*Type of loan- everyone takes IO loans?

Need help here with the concept of IO-
Can anyone tell me the 'system' around it
From what aI know- the idea is u never fully own the properties ever, you devise a system where it throws off positive income after all expenses paid incl interest on loan. U never pay principal and just live on the rolling income, hence never own it, principal never reduces. When u die, it goes to ur kids or trust - with the mega debt right??? And continues to throw off positive income, while increasing equity from CG hopefully.

Is this correct, is this how its done? I want to grasp the 'system', the works. Can anyone help finetune my goals above also by giving advice/correction etc, I would be really grateful.

thanks

 

[The Dark Knight]

Jamie M did a post in the finance section which hits the nail on the head regarding IO. Check it out it will explain everything but Everyone's strategy is different. I have 10 properties and I've got my ppor and 1 IP on principal and interest the rest on IO just for security and general peace of mind. I think its near impossible to build a large cash flow portfolio in a short time frame on P & I only.

 

[j_p]

Nice goals and you are certainly in a good position with $400k available to kick you along.

Starting with a property of around the $300k mark is a great way to go imo. Gets you in there and learning without taking on too much risk. With an 80% lend you will still have plenty of deposits ready for the future.

Good that you have some areas too, learn lots and what you can get in each. I'm looking at Brisbane and Wollongong for my next purchases so maybe I'm bias.

Cash flow and Capital gains are both needed to fund large portfolios unless you are on super $$$. Plenty of people here are successful targeting both.

Each property type has pros and cons. More important to get what works for you. Perhaps ring around and find out what the market wants in each area. Traditionally houses have been better for capital gains and units for rent. We have a 1 bed unit that has done fairly well in both so there are no hard and fast rules.

5 properties is where I see a problem for you, if you can make it work great. I can't see five getting you your desired income after expenses. Sorry. I don't think management is really that hard, with good management and the right props it shouldn't take up too much time. Do the numbers on this but it works out to $250 per prop per week after all expenses. Maybe you plan to purchase more expensive properties after the first I don't know. I think at some point you will need to go more even if you then sell down to pay off debt later.

IO is a well covered topic. Read the post suggested above and then search the site.

Finally! Speak to a MB and accountant about 90% lends with LMI. I know it is an expense but it will preserve you cash money. You will be able to purchase twice as much this way and can leave your cash as a buffer in offset accounts and reduce interest. This will increase risks if you bring everything up to 90% however.

Read about offset VS redraw, you want offset

 

[Rondofj]

Thanks for the tips guys, I just had a read of Jamie's post about IO loans and have started to see things in a new light. What happens after the IO loans 30yr period though? As we dont wana pay principal. Take another 30yr loan?

The good thing is the 300k loan after 25yrs will, after all the inflation over the years be like 50k at that time. Just like 100k was a lot of money 20yrs ago but nothing to talk about now..

I have always been of the traditional mindset of hoard cash n pay down debt as quick as possible (P&I loans) but am now starting to see that this doesnt accelerate wealth am I right. By the time u paid the debt off the next property you buy will have climbed up a lot in value and you will be where you started.

Still trying to come to terms with the whole IO concept, some banks like Commonwealth only do 5yr IO terms though. I dont plan to touch more expensive properties yet, I aint even started.. Robert Kiyosaki's Rich Dad Poor Dad -" take small baby steps at a time, fall, get up, learn"..

So roughly how much cashflow on average will 5 properties get me, say average prop price is 300-400k?
I dont understand how I can purchase twice as much with a 90% lend compared to 80%. Sorry for the questions, I'm a complete noob in all this, what I'm trying to do is build a 'system' in this game, once I'm happy with and confident in this system then comes action, hopefuly not too long. Dont wana just dive in with half my head in the sand..

 

[strongy1986]

The issue with your goal is that if you want to only hold 5 properties you will need to invest more than 250k for each one to achieve the 70k goal
I would say 400 - 500 might get you there

 

[j_p]

Speak to a broker, but most lenders as I understand give 5 years io with an option for another 5. Think some lenders have different options.

You'll have to work out how much 5 properties can make you. Look up how much a 300k prop rents for. If its 5 * 300 that's 75k a year before any costs, such as interest repayments.

As for 80% vs 90%. From your original post you have 400k cash - or did I misunderstand?
400k can purchase around 2m worth of property at 80% and twice that at 90%. Very over simplified.

Well its late and I'm done for tonight.

 

[Deltaberry]

There's a time and place for IO. I use it exclusively.

That said, recklessly leveraging only works in a market that rises over time.

 

[Jamie M]

Thanks for the tips guys, I just had a read of Jamie's post about IO loans and have started to see things in a new light.

Thanks for the mention - post is here http://somersoft.com/forums/search.php?searchid=9234546

Hope it helps.

Cheers

Jamie

 

[Cash Flows]

In relation to IO, most banks offer a 10 year period.

Once this is over, you will need to refinance the property.