When people say, look at how the deal affects your portfolio, what does this mean?

[Achimy]

For example,
Let's say my goal is 60k passive income, @ 5% yield = $1,200,000 mil portfolio paid off completely.

Now let's say the first property I buy is a 170k townhouse renting at $260. How does this fit into the bigger picture. Okay, now I need $1,030,000 of assets, but my yield requirements has changed. So how would this impact my strategy. What sense am I meant to make of it.


What I'm trying to ask, is what is the *meaning* of the asset in the overall picture. What decisions follow from this, what decisions do I have to make. Examples would be useful. Sorry if it's not clear, or a very abstract question.

 

[SK Investments]

I can't help with the specifics but for me asking myself "how does this property fit in with my goals?" brings about other questions like:
What is my current financial situation?
Do I need a higher yield to prop up future lending?
Can I afford a lower yield to get faster capital gains to enable more purchases?
Can I value add to the property (reno) for an equity gain?
Will buying this property give me a headache?
Etc etc

My example would be:
I secured funds with a goal to buy 3 properties in a growing market, that would pay for themselves.
I bought 2 near Brisbane, already tenanted, needing some maintenance/repair work = room to improve the value. They take care of themselves now, I'll tidy them up in the new year in preparation for a re-val.

3rd purchase I had less funds, needed higher yield and had to manufacture equity through a reno to secure more funds for the next. I bought regional Vic, ploughed in some cash, blood, sweat and tears and turned a $135k property into a $195k property (no market movement). End result an extra $40-50k from the bank and a $250+ pw rental.

For me it really comes down to where I'm at and what I need the next property to do for me.

 

[Achimy]

I can't help with the specifics but for me asking myself "how does this property fit in with my goals?" brings about other questions like:
What is my current financial situation?
Do I need a higher yield to prop up future lending?
Can I afford a lower yield to get faster capital gains to enable more purchases?
Can I value add to the property (reno) for an equity gain?
Will buying this property give me a headache?
Etc etc

My example would be:
I secured funds with a goal to buy 3 properties in a growing market, that would pay for themselves.
I bought 2 near Brisbane, already tenanted, needing some maintenance/repair work = room to improve the value. They take care of themselves now, I'll tidy them up in the new year in preparation for a re-val.

3rd purchase I had less funds, needed higher yield and had to manufacture equity through a reno to secure more funds for the next. I bought regional Vic, ploughed in some cash, blood, sweat and tears and turned a $135k property into a $195k property (no market movement). End result an extra $40-50k from the bank and a $250+ pw rental.

For me it really comes down to where I'm at and what I need the next property to do for me.

That helps a lot. For that 3rd property which you gained, could you pm me details of how you worked out you'd reval at that much? perhaps link to the property or research you did (sorry if a bit much to ask), but I want to understand which comparables you sought

 

[Redom]

For example,
Let's say my goal is 60k passive income, @ 5% yield = $1,200,000 mil portfolio paid off completely.

Now let's say the first property I buy is a 170k townhouse renting at $260. How does this fit into the bigger picture. Okay, now I need $1,030,000 of assets, but my yield requirements has changed. So how would this impact my strategy. What sense am I meant to make of it.


What I'm trying to ask, is what is the *meaning* of the asset in the overall picture. What decisions follow from this, what decisions do I have to make. Examples would be useful. Sorry if it's not clear, or a very abstract question.

Great reply from SK.

If you aim to get to that 1.2 mill mark in assets, its about how you can get there.

I think it'd help to cyrstalize and break down your overall goal with a plan to achieve it.

You can do it passively and buy 6-8 buy and hold assets and wait for them to grow. But then you need to work out how you'll get to the 6-8 properties. If its with cash, it'll require a fair bit of savings.

Alternatively, you can manufacture equity like SK has/is doing, and it will help you get to the next property and the property after that.

From a finance angle (my area of expertise), consider whether you're ok to get the finance you need to achieve your goal and your plan. This isn't about looking simply at the next transaction, but more so about the last transaction to get you to your goal.

Cheers,
Redom

 

[albanga]

SK and Redom have already made some great replies. Just one thing I would definitely add is timeframe. I think this is a critical step that many people forget but really it defines the strategy.
Your goal is 60k income at 5% which is 1.2mil asset base, but when do you want this by? 5, 10 years?
If 10 then you can likely take a more passive approach such as buy and hold. As long as you have the income to afford a few NG properties then you could likely achieve this with 3 well purchasd properties.

If however you want it in 5, then buy and hold is not likely going to get you there. You will need to manufacture your gains (subdivide, develop, Reno.etc).

 

[jerryparker]

Achimy,

Residential property yields vary from 3%-7% on a pre tax or after tax basis.

Lower yield is less risky as far as capital growth
Higher yield is more risky in terms of capital growth
What is Risk?...Risk is volatility...up & down swings in price
The tax effect
If you pay a lot of tax, a lower yield property helps you offset tax your tax and is a less risky property.
If you don't pay alot of tax. you have less disposable income, then you will look at higher yields that match or are higher than the interest rates of the day...but also carry more risk.

So you are balancing tax & risk against your cash flow & capital gain.

You are partnering with the bank and taking most of the risk. Portfolio balancing is about acquiring property and managing your risk.


So in balancing your portfolio, you utilise tax deduction to pay off property rather than give the money to the government.

If you have extra income to write off your taxes, you can buy a lower yield property and use your tax to make the payments.

If you have used all your tax deductions, you may choose to buy at least cash flow neutral or cash flow positive which is more risky

If you end up with a risky portfolio, ie high cash flow , high debt, and your income is low.then you need to manage that risk more carefully, even be prepared to sell something if interest rates go up.

If you have a less risk portfolio, and are less sensitive to interest rates fluctuations, then you can relax a bit more.

Other ways to balance your portfolio risk are
1. Buy in established areas that are heading for a period of growth (property research)
2. Add value when buying- negotiation, by off the plan and let the property increase in value during construction
3. Build new house and land- people pay premium for the finished product and the value high , rent higher, give more depreciation
4. Pick prime locations where everyone wants to live , not the cheaper back blocks (respect your money)
5. Disciplined approach to investment management- (put rents up every year)

 

[knightm]

For example,

What I'm trying to ask, is what is the *meaning* of the asset in the overall picture. What decisions follow from this, what decisions do I have to make. Examples would be useful. Sorry if it's not clear, or a very abstract question.

Some good replies - especially SK - nice one Keith

My experience was the same it was the cash flow on IP4 that hit me hard and stopped the purchasing for a while. In hindsight that one should have been higher yield or more value add opportunity to facilitate ongoing portfolio expansion. Your own LVR and DSR are the 2 key issues for the next purchase. Keeping these well balanced allows you to get max exposure to several markets then ride the cycles of growth and see improved cash flow. The combo of these is likely to help you reach your goal fastest. So IMO the "meaning" is buying something that fits your profile and goals including short, medium and long term cash flow and equity goals. To do this you manipulate the location, the assets itself and the price point.

 

[thatbum]

Lower yield is less risky as far as capital growth
Higher yield is more risky in terms of capital growth
What is Risk?...Risk is volatility...up & down swings in price
The tax effect
If you pay a lot of tax, a lower yield property helps you offset tax your tax and is a less risky property.
If you don't pay alot of tax. you have less disposable income, then you will look at higher yields that match or are higher than the interest rates of the day...but also carry more risk.

What? Yields aren't related to risk in residential property...

 

[SK Investments]

What? Yields aren't related to risk in residential property...

That also got my attention, I think the assumption was that higher yielding properties are in higher risk regional areas with lower CG. Which is clearly not a good assumption to make.

 

[Achimy]

Achimy,

Residential property yields vary from 3%-7% on a pre tax or after tax basis.

Lower yield is less risky as far as capital growth
Higher yield is more risky in terms of capital growth
What is Risk?...Risk is volatility...up & down swings in price
The tax effect
If you pay a lot of tax, a lower yield property helps you offset tax your tax and is a less risky property.
If you don't pay alot of tax. you have less disposable income, then you will look at higher yields that match or are higher than the interest rates of the day...but also carry more risk.

So you are balancing tax & risk against your cash flow & capital gain.

You are partnering with the bank and taking most of the risk. Portfolio balancing is about acquiring property and managing your risk.


So in balancing your portfolio, you utilise tax deduction to pay off property rather than give the money to the government.

If you have extra income to write off your taxes, you can buy a lower yield property and use your tax to make the payments.

If you have used all your tax deductions, you may choose to buy at least cash flow neutral or cash flow positive which is more risky

If you end up with a risky portfolio, ie high cash flow , high debt, and your income is low.then you need to manage that risk more carefully, even be prepared to sell something if interest rates go up.

If you have a less risk portfolio, and are less sensitive to interest rates fluctuations, then you can relax a bit more.

Other ways to balance your portfolio risk are
1. Buy in established areas that are heading for a period of growth (property research)
2. Add value when buying- negotiation, by off the plan and let the property increase in value during construction
3. Build new house and land- people pay premium for the finished product and the value high , rent higher, give more depreciation
4. Pick prime locations where everyone wants to live , not the cheaper back blocks (respect your money)
5. Disciplined approach to investment management- (put rents up every year)

I think you might be misunderstanding the question I was trying to ask. What you've told me is kind of basic, very generalised, information, and I'm not investing in property for tax purposes, I will be investing to make money, and then utilise property to minimise tax as a secondary objective.