Can or Will you retire on property alone?

@sash, instead of direct shares, could I use an ETF to do the same thing? I am not particularly interested in direct shares at this stage but that could change.

 

Yes you can....just have not moved to that yet.....the real issue I have is unless I want to pay a lot of CGT..I can't move a lot of money in till I have no income.

Have lots in cash but don't want to touch that either. I do plan to sell down at some point...probably will start from next year...will keep most in Melbourne and Sydney...

 

10 years ago, having 2.8 Million in cash assets seemed like an impossible amount of money. Im sure Im not alone there. 5.6 Million seemed like - well, double that. Beyond reach. I know Im not alone in thinking that. Now, I look at figures like that differently , because I have employed a very deliberate approach and it has done exactly what I said it would.

Point is, these are huge huge numbers for most people, and to get there you need to get a plan, pull the trigger on the plan rather than procrastinating, and then be patient enough for the plan to deliver.

To me, the reality is most people arent going to get anywhere near this if they dont completely change how they look at using resi property and leverage . generations have chased growth and very few have made that approach work for them. Its especially important for Sydney or Melbourne readers with 500,600,700K PPOR mortgages that drain 3-4K per month out of them, month in and month out for the next 25-30 years. - those forum readers need to have a serious rethink about how to get rid of that debt as fast as possible while retaining income streams.

If you earn 100K per annum for 40 years, you'll earn 4Million in a lifetime. Forgetting inflation altogether for a moment, after tax you'll clear @ 2.8 Million. So if you saved every dollar you ever earned , forever - you'd have 2.8 Million after 40 ish years.... just not going to work that way.

This is why PPOR debt reduction is so important. The faster you can rid yourself of 3-4K per month going out the door, the faster you can use leverage and that extra cashflow to redeploy it into income producing properties or other income producing assets.

You'll never get near 100K passive otherwise, unless you inherit money or win lotto or earn huge dollars. Most people will struggle to get to 50K passive, if you want me to be really honest.

This is why I advocate cash cows and using them for debt reduction. Its a simple approach that just works , but because of compound, opens up much bigger opportunities later in life .

 

@sash, with the ASX nearing record highs I don't think now is a particularly good time to buy in. Better to build up a war chest then buy up big when there is a correction.

 

iShares S&P/ASX 20 ETF | ILC

I would mix it up with weightings of ETFs like IRU and IJR for growth of the asset base.

 

That's where you are mistaken. I certainly don't rely on growth, growth is a bonus not accounted for, but hey, I'll take it.
The strategy I've outlined isn't anything unique and mysterious. Its basic developing and subdivision. Retain existing and building another dwelling. It's certainly no off the shelf type investment product that regurgitates the same figures. It's market dependent, you can't choose a suburb and stick to it or 10 years, it relies on abit to research and DD to repeat. Just like any other RE deal.

The key is to target areas, where there is a minimal price difference between a stand alone house and a unit of comparable size. (outer Melb suburbs had this, now it's regional). That way when you go to sell the original house after a cheap cosmetic reno, which is now a unit you can often recover the original purchase price or very close to it.

Here's an quick overview of my latest completed project. June 2016 completion. 15 month build.

Warrugul Vic.

Purchase 3/1/1 house on 861sqm cnr: 241k inc stamps
Reno: 6k
Rent: $290 pw

Build 16sq house 3/2/2 on rear 167k turnkey,includes plans, permits connections etc
Sub Div costs: 18k
Rent $320pw

Used large cash deposit lets put interest at 15k. Original house was rented during construction but we wont count that income.

Total cost $447k

Rent received $610pw (just over 7%) but need to deduct rates, pm fees etc

Unit 1 (original) est sale price on feasibility: 240k (based on older 3/1/1 sale prices)
Unit 2 est sale price on feasibility: 320k (based on new 3/2/2 sale prices)

Total cost $447k

Feasibility estimate end value $ 560k

Equity on completion $113k (market has since risen so actual would be around 140k mark, but lets not even worry about that)

I haven't sold either yet so can only rely on the feso ESP, but in the current market it will exceed that.

In regards to tax, GST etc, obviously its dependent on how you're structured, doing this often I treat it as a business via company/trust distributions, expenses etc so figures vary. Obviously taxation is an individual scenario and can be minimalised.

So now an investor has options, sit back and use the cashflow to pay down debt. Sell one, use the proceeds to pay off a massive chunk of the other and increase their serviceability. Or sell both, take profit and do another using more cash and borrowing less..

Certainly this is very basic stuff for any developer, but with abit of learning, anyone can apply this strategy. I've repeated this multiple times over the years.

Not rocket science and i'm sure none of the above is anything you don't already know. Then again i know i'm being baited so feel free to further dissect and go into holding costs like rates, pm fees etc.
But you can't deny its a great strategy for someone starting out on an average income, and certainly gives them options to move forward at the end of a 15 month project.

So given a choice between getting proactive and doing stuff like this over a 15 month period, or waiting for a 10k NRAS credit. I know where my money would be.

 

Not being baited. I wanted to see the details, and I wanted you to share them with the forum.

So gross rent is 610 per week income against 447K costs is the bottom line in that example? Thats very good.

I deliver dual occ at 530K with 630-650 per week rent . Also very good , and with the depreciation on 2 new dwellings I would say the after tax numbers are fairly close.

RE the 113 (or 140K ) of equity/ profit, how is that taxed ? ie do you receive any CGT concession due to company ownership structure ? whats the actual net realised profit in this example if it was sold?

Development isn't for everyone though. Even small subdivisions like you are suggesting. What I have elected to do is to keep things as simple as possible so that anyone can do them. But your numbers look good. For someone willing to source the sites, source the builders, deal with the council paperwork etc- could be a very attractive option. But for me, the inability to apply scale to the model makes it unsuitable for what my clients want - I need to be able to option 20, 30,40 lots at a time ... and dual occ in NSW is a complying development for dwellings 60M2 or less, so no DA /council rubbish to deal with. Quick. Easy.

 

Was the original house still tenanted whilst the construction of the new dwelling took place?
I also did one in Werribee but the new place was at the rear so I couldn't rent out the house so my costs went up.

 

I am doing one in Perth now where the front house is tenanted and I am building at the back. The tenant actually inspected the property while the excavators were there clearing the block so they have signed up and moved in knowing I am building. They didn't ask for a discount on rent but I discounted by $20 pw at listing because the tenant will be inconvenienced at times during construction.

 

Yep agree...the stuff I bought last Jan has gone up a lot......

 

I use two separate Company/Trust structures to operate. One company pretty much just holds property, very rarely selling. If I do sell through this company/trust, i'll sell the original dwelling. As long as I have held it for more than 12 months I get the 50% CGT discount.
The other company is set up to trade in these projects. So no CGT discount, GST needs to be accounted for in addition to company tax. No different to any business trading in my IMO, claim all expenses and deductions etc, then look at distribution etc

The above example I'm holding, as it was bought in the holding company. If I was to sell the taxation will vary depending on what is determined my original intention was when I purchased the property. I'd hope to get the 50% CGT discount at least on the original home. But that's up to what the accountant comes back with. Hence why I separate the projects now between two different set-ups.

Development isn't for everyone but in this current financial environment, with credit tightening, and funds slowly getting more expensive to borrow, anyone starting out will be hitting the walls alot sooner with the typical buy and hold strategy. They are gonna have to get creative and proactive if they want to increase their property holdings beyond modest levels. I know we both agree on this.

Yeah the strategy I outlined certainly can't be applied to any type of scale like your example. Especially with so many variants in costings. Every deal is unique and requires its own DD.

You have it good in NSW. In Vic the hardest and longest part of these projects is dealing with councils.

 

Plan to do the same on my block...how big was your block?

 

I've actually got one going on in Werribee as we speak. Its a corner block so it's alot easier to have it tenanted while building at the rear. I just put up a fence dividing the two.

In the hammer head block builds, I keep them tenanted but offer the tenants close to half price rent. Haven't had any issues with this, part of the deal is the tenants need to allow rear access via the driveway and the builders but up fencing to separate the properties.

 

Good stuff. Just to point out that the subject of the thread is can you retire on property, not develop a strategy that can be packaged up and sold as a generic investment strategy. That makes your strategy as valid as anyone else's.

Anyway, I am working on 2 projects now. First is a 3x1 to 4x2 conversion without changing the footprint of the house. That will boost rent by around $120 pw.

The second project is a retain and build behind. End rent should be around $450 pw which is a reasonable return.

My build is in Perth. It should have gone through council in 60 days but we ran into a couple of problems with council's planning scheme. I ended re-designing the lot plan for the builder and after they submitted the new plan we got an approval in about 2 weeks. Took about 4 months from start to end. Way longer than it should have.

 

Hi guys,

Thanks for the great read and fresh perspective, but you’ve put a little bit of the fear in me.

In 2013 my investment strategy, ripped from Pete Wargent and Michael Yardney, said buy and hold for CG, start regular contributions to an ETF, and live off equity down the track.

In 2014 I purchased a 2br unit in Dulwich Hill. In 2016 I opened a Vanguard ETF and have been adding surplus funds since. Now in 2017 I'm expecting pre-approval momentarily to buy the next property, again for growth rather than cash flow.

Hold the phone, says @euro73:

“...stop making growth your number 1 priority, and start making cash flow your number 1 priority.
The difficulty is, all too few are willing to do this. They continue to be lured by promises of great wealth from growth, even though very few people they know - members here included - have ever managed to gain that so called great wealth."​

Well that was a kick to the ego. And this from @MTR:

"Some years back LOE (living off equity) was the talk of the town, sounds good in theory, problem is there are too many risks, anyways.....bank policy changes made this strategy near impossible to implement.” ​

I wonder what @petewargent would say about that? Is your advice to achieve financial freedom by taking out a line of credit against a property portfolio still relevant today Pete, or unrealistic?

I'd be fickle to reverse my investment strategy on a whim, but a number of you with much more skin in the game than I are making me question my life choices.

What do you think guys, what's a 38 year old, post-APRA investor in his early accumulation phase to do?

 

Well there's plenty of ways to turn equity into cashflow. As a lot of people in this thread are doing, you can use the equity (either sell or redraw) to invest in higher yielding assets such as shares or commercial properties. It's never a bad thing to have cg.

 

What about starting an airbnb? I know mentioned before, this could generate some cash flow, not for everyone but could work for those prepared to put in the energy and time.

MTR

 

722 square.
First subdivision and huge learning curve and many mistakes.
Rear house I went to big, should have made it smaller to keep costs down and better returns.
Tenants cracked the $hits when construction started and their lease was up so they decided to leave. Tried to keep them And offered them half rent, but no go. Try finding new tenants at that time..

Purchased at peak in 2012 for 330k inc Stamps. Rented out for a year first. New build 180k plus subdivision costs, plus holding costs, plus council stuff around making me pay for parking bays, dog runs all over driveway the night freshly laid concrete driveway and delays finished product.
no tenants in front house total 580k ish.
Then, Front worth 310k, rear 320k total 530ish. Totally not worth it.

What I should have done, left it as is and today's worth would be 450k doing nothing. And would rent for 350ish.
And then bought another same size block with house on it.

I should have made the build smaller, instead of 19.5sq 3/2/2, I should have made it 3/2/1 15-16sq to keep costs down, had contracts signed for tenants to stay during the build. End costs would have been 540-550k max.

Today's prices worst to best case going by comparables.
Front house worth 350-370,
Rear 350-380. Total 700k min.
330 each in rent.
Excellent depreciation on both houses as the front one was loaded up with goodies when I bought it and not less than 10 years old.
Lucky they are in a rising market now, let's see how much more they can climb in the next 12 months.

Lessons learned, you don't know what you don't know. But once you do learn, you can make more money the next time round as long as dogs don't run along your freshly laid concrete driveway.

 

Please don't get too obsessed with trying to time the market. The asx may be lower or it can be even higher in 6 months time while you sit on the sideline. It's a good idea obviously to keep an eye on the valuation and keep some dry powder on hand for the big dips, however, a tried and true technique is still to buy at regular intervals.

 

Its a catch 22, you need capital first, read this if interested

Grow Capital First'

If you can find a strategy which gives you both capital and cash flow then you will be an investor on steroids

Some ways
Only buy in rising markets, as many as you can finance and sell down prior to peak, keep some, and turn negative properties into cash flow.

Add value by developing, renovating. If you develop 3 properties, sell 2, keep one, whatever brings cashflow and access equity and move on rinse and repeat

Find markets that provide unique opportunities, cash flow and capital.

Airbnb for cash flow,,,, no my gig, but may work for some.

I am sure there are other ways, but what I have been implementing