Building a Property Portfolio Impervious to Market Forces....

Discussion in 'Investment Strategy' started by sash, 23rd Jun, 2015.

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  1. euro73

    euro73 Well-Known Member Business Member

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    You are buying a 10 year time frame, and actually well beyond 10 years, because after the NRAS incentive ceases in 10 years the properties will be CF+ under their own steam - as they rertun to full market rent.

    The real question is.. if you can hold for 10,15,20 years without any costs, and receive 8, 9,10K tax free surplus cash flow per year for the next 10 years , with which you can deleverage, does the properties value in 1,2 or 3 years really have any impact ? Up down, sideways- if you have the cash flow to buy time - what does the short term price of a property ( or any asset) matter?
     
  2. D.T.

    D.T. Specialist Property Manager Business Member

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    It does matter, because it's the equity we need as deposit for subsequent purchases.
     
  3. mrdobalina

    mrdobalina Well-Known Member

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    Absolutely agree.
     
  4. Lacrim

    Lacrim Well-Known Member

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    "I'd rather have this portfolio than nathan birch's, that's for sure".

    Well, that depends on what Sash's portfolio consists of, and what valuations Sash has used for his flock.
     
  5. Tranquilo

    Tranquilo Well-Known Member

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    Hi Sash, is your LVR reducing because you pay PI also, or is it because over all your properties are increasing and that's why your LVR in decreasing.
     
  6. Switchtronics

    Switchtronics Well-Known Member

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    [/QUOTE] The real question is.. if you can hold for 10,15,20 years without any costs, and receive 8, 9,10K tax free surplus cash flow per year for the next 10 years , with which you can deleverage, does the properties value in 1,2 or 3 years really have any impact ? Up down, sideways- if you have the cash flow to buy time - what does the short term price of a property ( or any asset) matter?[/QUOTE]

    The equity would certainly assist with future purchases; in not requiring the deposit if enough equity is available. I see your point in cashflow assisting with off setting the mortgage, a way of generating equity. The cash flow advantages are certainly great for nras however I have seen some banks don't include the tax free payments as part of the income. How do you structure finance to enable each new purchase?

    Any areas that you feel generare the nras cash flow however will also hold and grow equity in Perth?
     
  7. sash

    sash Well-Known Member

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    Some are still being built (2 at the moment)....the other thing is annoying...is that I will have 5 vacancies to fill just before Xmas..I am quite certain I will have these cycling vacancies filled. Unfortunately...one is in WA..where the rental market is not so good...I expect to take $20pw less on it when it releases....bugger!!

    Gross...holdings not net..

    Once the 5 vacancies are filled ....and 1 build which is expected to complete in Nov is filled ...I expect to have about 8.5-10k net every month. Bear also mind ....I still have land tax across all states equivalent to about 14k pa...all these bloody costs add up. As I said...with property if you can get 3-3.5% net yield on net assets you are doing really well.....
     
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  8. euro73

    euro73 Well-Known Member Business Member

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    This is where we depart strategies DT. I come from a banking mindset and I am bearish on credit availability, and therefore bearish on growth. I invest assuming constrained credit availability and the subsequent constrained growth the credit environment creates. In other words, I assume the next decade will be very different to the last decade, growth wise. I intend to use the decade to build a large footprint and deleverage the debt against it.

    We have ultra low rates already and its unlikely they will get much lower. Even if they do, rate cuts will not translate to borrowing capacity as the assessment rate floors have ended that policy. We are going to see higher funding costs, further diminished servicing, possibly reduced LVR's, very probably reduced equity /cash out and almost certainly reduced I/O availability - in other words, most peoples borrowing capacity is about as good as it gets, and it's only likely to diminish further in the coming years. This does not create the circumstances for a high growth environment.

    Equity is not the game. Borrowing capacity is the game.

    2 investors- same age, same income, same debt. same goals

    Investor 1 owns 5 NRAS properties and is generating 40-50K of surplus tax free cash flow per year. They pay down non deductible debt with that money, creating both debt reduction and equity , even without growth. Their borrowing capacity is reduced in the short term because of the 20% reduced rent, but ultimately they improve their borrowing capacity faster than investor 2 because once they are deleveraged by removing non deductible debt , they can actually access it/ replace it with deductible debt , which allows them to utilise rental income and neg gearing on lender calcs. But their net debt doesnt increase by as much as Investor 2, who hasnt made any inroads into his non deductible debt

    Investor 2 owns 5 non NRAS properties . They are not generating any surplus cash flow and not making any extra repayments against their non deductible mortgage, because the 5 investment properties consume all their spare cash, and even after tax they are only just CF neutral, typically.
    And as rates continue to nudge upwards due to BASEL IV re-capitalisation, and as their I/O terms end and they find it difficult to secure new I/O terms or refinance elsewhere because of the harsher post APRA calcs, their capacity to pay down non deductible debt diminishes even further.

    Now yes, they "may "get a lot of growth, but unless they can borrow against it they will have to sell to access it. And that's "if" they get the same type of growth investors have been able to achieve in the expansionary pre APRA world.

    Not saying any of that's impossible. Just saying my strategy doesn't rely on it. Investor 1 can make lots of money even where there's little or no growth - the cash flow buys Investor 1 10 + years to ride this new credit environment out - and while Investor 1 is waiting, they are deleveraging and Investor 2 is not.

    For me, NRAS is ultimately a fully franked equity cash cow backed by bricks and mortar, and I'm executing a dividend reinvestment strategy. Take dormant equity ( typically 60-70K) - use it to fund deposits and costs and buffer and earn 8-10K tax free returns (12-13%) then reinvest that in paying down 4.5-5% debt... the underlying asset doesnt need to appreciate in value to generate phenomenal returns. I hope it does... but my point is- it doesnt have to.
     
    Last edited: 25th Oct, 2015
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  9. DaveM

    DaveM Well-Known Member

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    So the typical NRAS property is cashflow neutral at 20% under market rent, including management fees and all outgoings, allowing the $50k to be 100% dedicated to non deductible reduction?
     
  10. euro73

    euro73 Well-Known Member Business Member

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    The typical NRAS property is going to generate @20K of deductible losses from cash flow and depreciation. ie 10K from cash flow and 10K depreciation. It may be a little more or less though- depending on the property. But yes, this is a typical result an investor could reasonably expect for a 350-400K price range (except in Melbourne apartments, where market rentals yields are poor)

    If you pay tax at 32.5% + medicare, your effective MTR is 34.5%. .
    Your ATO refund against a 20K loss would be $6900, plus $10,917 NRAS. $17,817 total refund. Set aside 9-10K for the next years cash flow "gap" and invest the other @8K in debt reduction

    If you pay tax at 37% + medicare , your effective MTR is 39%.
    Your ATO refund against a 20K loss would be $7800, plus $10,917 NRAS. $18,717 total refund. Set aside 9-10K for the next years cash flow "gap" and invest the other @9K in debt reduction

    If you pay tax at 45% + 2% "rich tax" + medicare , your effective MTR is 51%
    Your ATO refund against a 20K loss would be $10,200, plus $10,917 NRAS. $21,117 total refund. Set aside 9-10K for the next years cash flow "gap" and invest the other @11-12K in debt reduction

    This amount increases each year, if you follow some basic disciplines

    1. Use 3,4 and 5 year fixed rates so that 90% of your costs dont move .
    2. rents will increase annually ( by rental CPI)
    3. the NRAS tax credit will increase annually ( by rental CPI)

    So if you can fix the majority of costs, but your incomes are increasing, you should see significant annual increases to the CF+ surplus you receive.

    Because the NRAS credit is a fixed amount per dwelling, obviously cheaper properties offer more potent cash flow and Return on equity than dearer ones.

    Across ten years, the power of NRAS to pay down non deductible debt is compelling.
     
    Last edited: 25th Oct, 2015
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  11. Perthguy

    Perthguy Well-Known Member

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    Hey sash, how do you actually manage your cash reserves. I have some cash put aside for a PPoR next year and it is currently in offset accounts. I was wondering if there is something more productive I could do with it in the meantime.
     
  12. Rich2011

    Rich2011 Well-Known Member

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    Please PM me the details of the Sydney one...
     
  13. D.T.

    D.T. Specialist Property Manager Business Member

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    Fill up non deductible offset first , this will give you better risk adjusted / tax adjusted return than just about anything. Then start filling up the deductible offsets - which of course isn't as good. Review your asset allocation at that point, you'll probably find you're 90% property / 10% cash... time to get some etf / lic exposure imho
     
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  14. sash

    sash Well-Known Member

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    I just keep it in offsets.....sharemarket is too volatile.
     
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  15. Greyghost

    Greyghost Well-Known Member

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    Mate this is Sash's thread about his strategy and portfolio.
    You have high jacked the hell out of it with long NRAS posts.
    Please start your own thread regarding all of this.
    It makes for difficult reading when we are trying to follow this thread but it is filled with off the topic content.
    By all means, I'm happy to read about your portfolio and strategy, just in the correct thread. Thanks.....
     
  16. Mumbai

    Mumbai Well-Known Member

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    Well greyghost, I understand what you mean and I don't like rummaging through long NRAs posts to find relevant info. But..I mean BUT, title of the thread is building portfolio impervious to market forces. Euro is trying to provide an alternative to sash's strategy.

    Again, I am not defending NRAs, only Euros point of view!
     
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  17. Chris Au

    Chris Au Well-Known Member

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    An invaluable thread! Many thanks for comments and questions throughout.

    Sash, I'm wondering how much you take the state macro-economic factors into consideration - e.g. the Commsec State of the States reports or is this taken into consideration by your first point (buy in the 5 major capitals and major regionals), and letting time ride through the ups and downs.

    Cheers,
     
  18. sash

    sash Well-Known Member

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    I read a lot.....and yes I look at the Macro-economic factors a lot. Thus why I said at the end of Sydney price increases in late June based on Sydney cycle, APRA changes, consumer uncertainty, and knowing that the Aussie press will beat up the market.

    I also feel that the current uncertainty will also affect other markets temporarily. Thus why I am not in a hurry to buy at this point.

    As for Sydney....the correction is already underway.....I believe this time around it will be the West, Southwest, and Northwest which will bear the largest correction. Some areas have almost tripled since 2007.
     
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  19. sash

    sash Well-Known Member

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    I am starting to price down my Sydney properties....so for a short window I may just dip down in vals. However, some of the Brisbane stock has increased about 30-60k last year....and South Australia is up with the exception of Elizabeth ...uo by 30-40k.
     
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  20. sash

    sash Well-Known Member

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    No ...my excess CF is now in the order of 140-200k pa depending on renos, expense, and purchases. This includes PAYE income and interest compounding.

    Technically my LVR will not change as it is all in offsets. Don't know if this makes sense to you.

    Leaving cash in your offset for 1 month...and paying via credit card on the due date via direct debit is gold.
     
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