Hi Dennis,
Your right in that you are going to need to have the servicibility to go on and keep building a portfolio. Once you determine what your end goals are eg how much passive income you would like and in what timeframes, then you can work out the size your portfolio will need to be. eg 3m will 2m net, or 5m with 3.5m net etc.
OK, so to really nail this down then. My after tax income is about 1000 per week. So realistically, I can service about $200 negative in my whole portfolio per week. Ideally, I would like to first achieve $50K/pa passive 'money' (not income as I'm counting equity gained) and then eventually $100K/pa passive 'money', all in today's dollars. To that effect, assuming things grow at an average of 4% per year (counting in holding costs) moving forward, working backwards, we would need firstly $1,250,000 in today's equity and then $2,500,000 in today's equity. Right now, I have about $300,000 worth of investable assets, not including current investment property. Assuming $50,000 of that money is purchasing costs, that means I only have $250,000 of investable assests. Then, if I assuming slight negative or neutral cashflow for each property, at 80% LVR over the entire portfolio, I can buy $1,250,000 worth of property. If I go to 90% LVR, I can get to $2,500,000 already! Additionally, of the 35-40K pa I save, I could then buy $250k property each year, to be on an additional $2,500,000. So total after 10 years, it could be up to $5,000,000 worth of property. Now that does not answer the question of passive income because you can't really spend equity money for lifestyle costs, so technically assuming that 4% growth each year is 1% rental income and 3% equity gain, you would then need $10,000,000 in today's worth of property to retire on $100,000/pa of today's money or $5,000,000 in today's property to be at $50,000/pa. If you think about it actually $50k/pa is quite a lot to live sensibly if you own your own home. But that means in my case, my maximum passive income would be $50k/pa and $100k/pa would not be achieveable then. Are these calculations on the right track?
Then if i were you i would do this:
1. purchase property that is not yet a 'hotspot' but has a lot of those growth drivers you know about. This will require you to spend the time to research carefully. You can listen to what other experienced property professionals (eg terry ryder etc) are saying in terms of suburbs that may be a next hotspot, but ALWAYS, ALWAYS, ALWAYS do your own due diligence to confirm if you believe they may be right or not.
2. Make sure you buy the property at a discounted rate (should be possible because remember you WILL NOT buy into any boom market). Also make sure that you understand the demographics of the suburb you are buying into so you can determine what is most prevalent in the area eg houses, units, town houses etc, then purchase according to that demographic. Its nonsense to believe only buy houses or units. You need to buy according to the demographic of the area. Always try to buy under the median value of the area.
3. Buy something that you can also add value to, eg cosmetic reno, subdivide, maybe add a room etc.
4. Aim for neutrally geared or maybe slightly negative. I hear you talking a lot about yeild. You are in the accumilation stage of your portfolio building, and CG is the aim of the game. Forget about trying to be hardcore positive cashflow. As long as its neutral or perhaps a little negative, you will be able to hold the porperty and realise the CG in the medium to long term.
5. Diversify. If NSW is in a boom market, then look at other states where they are say at 6 - 8 Oclock. Never, ever buy in a boom market. The reasons why not to is obvious. You'll also need to along the way, build a good team of professionals that will help you make sound decisions eg fiance brokers, lawyers, accountants, property managers etc. They are crucial to your success. You need to develop this team.
If that's the case, then within 50km of Sydney is out of the question then as we are booming. I thought the Balmain one would be perfect:
1. Drastically below median value (900k where the median is 1.3)
2. Discounted rate as the vacant land value is 891K already, so basically you paid 10K for the building.
3. Ability to add value e.g. refurbish and create a car space at the back of the property, renovating the indoors and also potential to knock down and rebuild later on as it is a good size chunk of land (200sqm).
4. Growth factors: 5-10 minute drive to Sydney CBD, 10 minute walk to Balmain Hospital, 10 minute walk to Balmain Public School, 10 minutes to Woolworths
The only thing creating difficulty is the cash flow which is roughly $180 per week out of pocket (after negative gearing). If I could guarantee that it would only cost $180-$250 per week for the next 10 years I would definitely buy it, I'm just afraid of the interest rates.
Realistically, I am looking to spend about $250k worth of equity/cash and then each year after the next, save 1-2 deposits per year and have one each year until the 10 year mark when all the money will go back into paying down the LVR of each property. To that effect you could have a mixture of expensive and cheap properties, or all cheap? What would you do?
Also, how do you read those demographics graphs? For example when you look at the incomes, what are you looking for? If the average house hold income for one suburb is $2500 per week, versus $1000 for another suburb, which one is "better" for capital gain? If there are more than 35%properties in the suburb being owned by investors, I'm assuming that this is "bad". If there are more families in the suburb, I'm assuming that they'd want 3/2/1s rather than 2/1/1s?
