Using a buy & hold strategy, in how many years did you reach financial independence?

Using a buy & hold strategy, in how many years did you reach financial independence?

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skater said:
I look at it this way. You can buy your one $400k property with a 3% yield, while I buy two $200k properties with a 7% yield. The tide, when it comes in will raise the values of all properties (for instance, Sydney). Your $400k property will rise in value to $800k, and my $200k properties will rise to $400k. So, we are still roughly at the same level of assets & equity to how we both started at the beginning, right?
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It is impossible to argue with the logic of this - but it is a big assumption to say the "tide" will rise the value of all properties in the same proportion.

This would seem to discount the whole idea of growth drivers, infrastructure etc driving the prices in certain areas.

Maybe it depends on the time period your are looking at - but the current massive differences in Sydney property prices were not always there.

It is a big advantage if your parents invested in Balmoral rather than two in Bankstown all those years ago.
 
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Tonibell said:
It is impossible to argue with the logic of this - but it is a big assumption to the "tide" will rise the value of all properties in the same proportion.

This would seem to discount the whole idea of growth drivers, infrastructure etc driving the prices in certain areas.

Maybe it depends on the time period your are looking at - but the current massive differences in Sydney property prices were not always there.

It is a big advantage if your parents invested in Balmoral rather than two in Bankstown all those years ago.
Click to expand...

+1 Agree

Cheers,
Oracle.
 
Tonibell said:
It is impossible to argue with the logic of this - but it is a big assumption to the "tide" will rise the value of all properties in the same proportion.

This would seem to discount the whole idea of growth drivers, infrastructure etc driving the prices in certain areas.

Maybe it depends on the time period your are looking at - but the current massive differences in Sydney property prices were not always there.

It is a big advantage if your parents invested in Balmoral rather than two in Bankstown all those years ago.
Click to expand...

LOL! Embarrassingly, I had to look up on a map to even know where Balmoral was.:eek:

I'm making some presumptions here, since I probably wasn't even around when Balmoral came into being.

It is my understanding that much of Bankstown is made up of post war dwellings, very much on the outskirts of Sydney (at the time) and that it was mainly farmland when the likes of Balmoral was first developed.

My mother-in-law, if I'm remembering the story correctly (hubby may correct this later) lived in Brighton-le-sands, and when she & my father-in-law married, they bought & built their home in Auburn. I'm not sure of the year, but I know that at the time, it was in the middle of nowhere. They bought there, as it was cheap at the time, and built the place bit by bit as the family grew, and finances allowed.

So, I guess what I'm trying to say, is that it's always been cheaper to buy on the outskirts of the City. Exactly how much cheaper, I'm not sure, but my own experience has been that whenever there has been any significant movement, the whole of Sydney moves. The keyword here is significant.

In saying that, of course, there are markets within markets. Some may move a bit more than others depending on various drivers in their own little marketplace.

So, I guess the average cost of a house in Balmoral may have always been more than double the house price at Bankstown. It's certainly a lot nicer place to live in from my brief look at it, but since I've never really looked at buying either of them, I couldn't say if that is right or wrong.

Just did a quick look at realestate.com.au, and there isn't any listings at all for Balmoral. The only listings for a 3 bed house in the area were around Mosman, and the cheapest was in no way comparable to the average Bankstown home.

This is the cheapest 3 bedder I could find: http://www.realestate.com.au/property-house-nsw-mosman-119369119
 
Not just a random sample !

Sliding doors moment for my mum and her sister.

Balmoral is a great place to visit - probably a pretty nice innestment as well. :eek:
 
Rixter said:
Buy & Hold for financial independence is not a short term investment, rather a long term one and needs to be structured accordingly.

Nothing is risk free, no matter what the investment. One should always work towards maximising cash flows and minimising risks whenever possible.

As such, one method to minimise exposure risk in relation harvesting of capital growth for the purpose of LOE is to structure one?s portfolio so as to provide more than sufficient funds to maintain their chosen level of lifestyle for a period 10 years or over and have those funds already approved, secured and available for ready access.

For example, with a $4 Million 65% LVR portfolio, structured for CG and cash flow neutral/+ , with a chosen lifestyle budget of $1000 income tax free per week (equiv to $1280 Gross payg) the calculation would look like this ?

$1000 x 52 weeks = $52k.
$52k x 10 years = 520k.
Interest on Interest component for $52k per year over the decade @ say 6.5% avg = $90k
Secured equity required for LOE across the decade = $610k (520k + 90k).

Portfolio Position starting LOE.
Value $4,000,000 less $2,610,000 ($2,000,000 (50%LVR) + $610,000 credit limit secured for progressive draw down of $52k per year over the following 10 years ( 15% LVR )) = TOTAL $1,390,000 equity (65% LVR )

Portfolio Position after 10 Years of LOE.
Value $8,000,000 less $2,610,000 (debt) = TOTAL $5,390,000 equity (17% LVR)

So let's now look at an example on the cash flow component and use a very conservative 5% rental yield on the $4,000,000 asset base, with a 6.5% bank interest rate, starting the LOE harvesting phase.

$4,000.000 x 5% = $200,000 rental income.
$2,000,000 (debt) x 6.5% = $130,000 +( $3,300 p/a interest on the $52k LOE per year)compounding for 10 years.

At the completion of 10 years Portfolio Value = $8,000,000 with debt TOTAL of $2,610,000 x 6.5% bank interest = $169,650.
$8,000,000 x 5% conservative rental yield = $400,000.
$400,000 minus $169,650 = $230,350 cash flow positive.

Property investing / Portfolio building is not about property - it's about finance! Property is merely what banks take hold over as security for loaning you the finance in the first instance. As such, financially structuring oneself correctly so as to place yourself a position of being able to continually access funds whenever you need/want is vital - whether it be for investment/business and/or lifestyle.

You need to have the foresight to plan ahead years in advance. You don?t want to paint yourself into the proverbial DSR corner with no options left to go - it's too late then.

However, let's play devils advocate and after 10 years say you don't meet bank DSR requirements for LOC credit limit top ups for the next 10 year round - you can always sell down a portion to pay out the $2,610,000 debt and see out your remaining days LOR with a $5,390,000 mortgage free property portfolio (less selling costs).

One of the LOE advantages people don't realise is once you're financially structured correctly you only need sufficient cash flow to cover the interest component on your lifestyle & portfolio holding expenses, and not the actual lifestyle & portfolio expenses themselves.

As such it allows the option, should one elect to, exit the rat with financial independence years earlier in comparison to waiting for sufficient positive cash flow from rental income.

It's a totally different paradigm than most of society is accustomed to. The poor/middle class are raised within a cash for income paradigm, where as the wealthy are raised within a capital for income paradigm.
Click to expand...

Hi Rixter

You were only allowing a lifestyle budget of $52k pa at the start of your post. Can you please explain what "$230,350 cash flow positive" relates to ... is that how much you would have in excess funds to live off in 10 years time, if you have $4m of assets with LVR 50% today [I'm pretty sure I'm wrong please correct me!

Sorry if I'm misinterpreting your numbers / post ... :confused: not great with numbers

Everyone else ... please feel free to jump in and help out the slow one [me!] :eek:
 
cadence said:
Hi Rixter

You were only allowing a lifestyle budget of $52k pa at the start of your post. Can you please explain what "$230,350 cash flow positive" relates to ... is that how much you would have in excess funds to live off in 10 years time, if you have $4m of assets with LVR 50% today [I'm pretty sure I'm wrong please correct me!

Sorry if I'm misinterpreting your numbers / post ... :confused: not great with numbers

Everyone else ... please feel free to jump in and help out the slow one [me!] :eek:
Click to expand...

I think what Rick is trying to say is that in 10 years time his debt will be $2,610,000. If the loan interest on this amount is 6.5%, and he is getting 5% yield from his properties, then the financial situation will look like this:

Rental income: $400,000
Interest Paid: $169,650
Equals Positive Cash flow $230,350

Although that's not the whole story. There's still a heap of expenses not accounted for in that scenario, but he's trying to get you to understand how his LOE will hopefully pan out for him.
 
Oh yes thank you skater.
there will of course be other expenses like rates, insurance etc on the IPs which needs to come out of the 230k so the net position will be lower
Thanks for clarifying
 
Highlygeared said:
Gather you're not a beach person Skater lol. Balmoral is arguably one of the best calm water beaches in Sydney. Love to own an IP there but would literally bleed me dry in repayments.
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I'm a Wollongong girl. Moved to Western Sydney some 17 odd years ago. I can't really name a lot of Sydney's beaches but I know all of them down South.
 
skater said:
I think what Rick is trying to say is that in 10 years time his debt will be $2,610,000. If the loan interest on this amount is 6.5%, and he is getting 5% yield from his properties, then the financial situation will look like this:

Rental income: $400,000
Interest Paid: $169,650
Equals Positive Cash flow $230,350

Although that's not the whole story. There's still a heap of expenses not accounted for in that scenario, but he's trying to get you to understand how his LOE will hopefully pan out for him.
Click to expand...

That scenario is just an example I've used if some one was looking to draw down the average wage in todays dollars.. If you allow another 1% portfolio value for other holding expenses including management you should have them covered....what do you think skater?
 
Rixter said:
That scenario is just an example I've used if some one was looking to draw down the average wage in todays dollars.. If you allow another 1% portfolio value for other holding expenses including management you should have them covered....what do you think skater?
Click to expand...

Grrr....you made me get my spreadsheet and a calculator out. Damn you!:D

I reckon 1% is a bit light on. Looking at a cross section of my own, I work it to be from 1.3% to just over 2% depending on the property. It all depends on the value of the property and the value of the expenses. In a lower value property the expenses are a much higher percentage.

For instance, compare two of my properties. Both, at today's value yield around 5%. The first one is a regional worth only around $190k. The second is in outer Sydney worth around $440k.

The cost in $ is similar for rates, maintenance and insurance. Water is a little more expensive for the regional, and PM fees are a little more expensive for the Sydney one, mainly because it gets more rent, but on average they both have a similar $ value in expenses, so if you look at it from a percentage viewpoint the hold costs are higher on the lower price property. Mind you, I only owe $42k on that lower priced property, so there's no complaints this end.;)
 
skater said:
Grrr....you made me get my spreadsheet and a calculator out. Damn you!:D
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hehehe..... yeah it varies slightly depending upon IP. 1% is what I've always worked from and its been pretty much on the mark with my type IP.

So cadence, in relation to the initial example provided, allow $80-$100k for holding expenses.
 
Rixter said:
hehehe..... yeah it varies slightly depending upon IP. 1% is what I've always worked from and its been pretty much on the mark with my type IP.

So cadence, in relation to the initial example provided, allow $80-$100k for holding expenses.
Click to expand...

The thing to note, moving forward, is that your income should move at a greater rate to CPI.

For instance, in a job, if you are on $100k, you might get a 3% rise each year. With property, your income rises along with rent rises, but your debt on each one doesn't, so your expenditure, in relation to the income reduces.:D
 
skater said:
The thing to note, moving forward, is that your income should move at a greater rate to CPI.

For instance, in a job, if you are on $100k, you might get a 3% rise each year. With property, your income rises along with rent rises, but your debt on each one doesn't, so your expenditure, in relation to the income reduces.:D
Click to expand...

Correct, property values & yields increase out stripping cpi..other wise there is no point to use property as an investment vehicle.
 
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