Cash cows

Why not just network with @ellejay to the max and get all the inside scoops. I think she's done well with NZ property.

 

Unfortunately NZ is like Oz now. Some areas are at or near peak, not easy to borrow. You can still do okay though as in practically any market.

 

Where did you buy in NZ if care to share?

 

@MTR @ellejay

 

Works much better in larger regional areas of NSW. Lower price point. Much higher yield. Less impact on land tax threshold.

 

I understand the need to have cash cows but new stock in the middle of woop woop can't be the answer surely.

 

I'm not sure that 'large regional areas' = 'woop woop'. Albury, Cooma, Wagga, Goulburn would be good candidates to have a look at.

Different strategy but I used to deal with a business acquaintance who would buy up the service stations and supermarkets in small regional towns in Victoria, typically with a population of around 5,000 and low population growth prospects. His idea was that the town wouldn't grow fast or large enough to support a second supermarket or service station and he could maximise returns through low competition.

 

I love when such impressive mental aptitude is on display. Neither Orange nor Bathurst are what one might remotely describe as being in the middle of woop woop. Perhaps you and @Biz need to take a road trip together to discover that the edge of the world doesn't end at the last suburbs of metro east coast cities. Both of these regional cities are going very very well.

 

I've got nothing against Bathurst, Orange, Whereverville. I Just think what you keep pushing isn't going to help someone significantly move forward.

On one hand you keep going on with this #decadetodeleverage!!! Then you are saying here, take on another 500k debt so you can get 5-10k cashflow. Where is this cashflow going to be in 3 years time if rates are 2 percent higher than they are now or the banks force more people onto P&I? You say fix for 5 years? Fine, then where are you after 5 years? You'll be left with a niche half way house likely worth less than what you paid. Ok, you can use that cashflow to smash down some debt but how much? 20-30k maybe? Not going to set the world alight.

5 years ago this strategy could have been a goer. Rates were low or going lower and prices were increasing. Now we have rates heading higher, servicing getting much harder and prices stagnating. I'm not anti duel occ, I own a couple but I did them when conditions made sense. Going in now, especially in a regional area ? Good luck! Just make sure you bring your snorkel because you will need it for the rest of this #decadetodeleverage

 

No personal offence euro73 and I have tons of respect for your opinion on this forum...but for example, I bought a house in Mount Druitt in the mid to late $200s in 2012 - that was good value. Similarly bought a 3x1 in Campbelltown for the same money around the same time. That was good value. Bought a 3x1 in a suburb < 8kms from Brisbane CBD for < $400K about the same time - that was good value.

A brand new house in Bathurst for $500K - not good value IMHO, no matter how many tax perks you throw at me.

Bet in 10 years that property is still worth the same (maybe even less). I agree 110% with everything else you bring to the table about deleveraging, increasing cashflow etc but buying what seems like overpriced property in regional areas is not the path to wealth.

Cashflow alone is not enough. You need scarcity factor, an area hordes of people want to gravitate to because of jobs and lifestyle choices, infrastructure, land constraints - all those ingredients are missing from this proposition. PROVIDED I can hold on to my portfolio (and that's the dilemma with my strategy), my net worth will trump yours if we started with the same dollar value of properties - that at least is a given.

 

Whatcha got as an alternative? Sit back and wait for the P&I cliff? Sell up? All well and good to be a keyboard critic, but when there's nothing of substance being proposed, its just a whole lotta nothing.

The decade to deleverage started 4 or 5 years back, you may recall? Its not a new thing. I havent just started floating the idea of cash flow. Ive been at it a good while... dont imply this is something new. I have been well ahead of the curve on this. Well ahead.

Now we have moved past cash cows simply being deleveraging vehicles. They may well only serve as debt reduction tools for the first 5 years, but what you're not considering is their holding power. How helpful will an extra 5K per annum look for investors with immature rental yields on their other properties when they hit that P&I cliff I wonder? Knock it all you like, but you aren't exactly prolific with alternatives. So tell us...besides extra income, what else do you propose will help them avoid having to sell when P&I comes knocking? We are all ears...

And just quietly.... those regional "half way houses" you imply are so likely to be worth less than what you paid, are up 50K on settlement. First tranche just settled and they are getting 580K valuations on completion, against 530K purchase prices.... land prices in Bathurst have jumped 50K in just the past 3 months.

 

They run pre tax positive....you may have dual occ confused with NRAS?

That's a bold assumption, seeing as the properties which sold for 530K are now valued at 580K - less than 6 months later. I think some of you need to re-visit your views on locations such as Bathurst and Orange. With the new stamp duty concessions now taking effect in NSW, I would not be at all surprised to see these types of locations surge.

This is where your argument falls down. Your net worth isnt the end game...your net income is.
I can sustain a much larger dollar sized portfolio because I have superior income from my portfolio.
In turn, this means I can reduce debt without selling ( I get to hold on to all my income)
I can also improve borrowing capacity over time through debt reduction, which allows me to purchase additional CF+ assets (again, without selling any of the existing portf0lio or its income) which further grows my income and further accelerate debt reduction, and repeat, repeat.

This is a simple culture clash of a CF+ dividend reinvestment plan versus a CF- speculative growth strategy ,and what is most suitable for the times. The latter worked far better than the former in an expansionary credit environment. The former will prove better than the latter in a contracting credit environment .

 

It will be different strokes for different folks. Some wont need to deleverage, some will and some will find a balance for their goals and portfolio. I don't believe (not that I am saying anyone is saying this) that a blanket message for all to deleverage is prudent. I only over the last 12-15 months started to deleverage, and if I would have started that say 4 or 5 years ago, my net worth would be a few mill less today. So each person needs to proceed according to their own situation re debt/leverage/CF, serviceability etc.

 

Totally agree with this. A couple of grand a year per property with FA capital growth potential won't get you to cocktails on the beach.[/QUOTE]



My 4 townhouse development in Thomastown which I sold OTP was cash flow positive for investors that purchased, however this would include depreciation. Would prefer this product, 17 km from CBD than whoop whoop

 

we can have blood on the floor with our cash cows and cash not cows discussion...

but

< do not insert cash cow pictures here>

 

My alternatives don't involve property at the moment, business stuff, not for the average punter. Will wait to see what happens in a few years time once all the changes to lending have taken effect before entering the market again as far as IP's go.

Sometimes it's good to just sit back, watch and wait.

 

Well, if you want to load up your portfolio with $500K plus dual occs in regional towns bc they're cashflow positive, go ahead. I'm not knocking anyone's strategy but I will say its not for me. $500K is not a small sum of money if you're throwing it around regional towns.

I'd rather spend $500K on a fibro ******* close to the CBD in a metro city at the start or bottom of the cycle that yields 4-5% or so....P&I cliff or not. I can always manufacture yield/equity via a reno, add a bedroom by tweaking the layout etc. You can change the house. You can't change the location.

Back around 2011, a relative of mine sold his house in the Eastern Suburbs. Said the land tax was excessive, yield was low, Sydney market unlikely to boom anytime soon, etc. Sold it for $1.6m. That property is probably worth close to $3m today.

What will a $500K + dual occ in Bathurst be worth in 6 years, and what's going to drive the growth?

I mean if I were chasing cashflow first and foremost, I'd be looking at the stockmarket. Much easier, minimal entry and exit costs, no tenant hassles, no need to worry if the factory down the road closed down etc.

Still have a lot of respect for you though euro73 - I always find your posts insightful.

 

Pains me just reading that

 

Unfortunately you cant gear into shares at 80% LVR. Even if you could, the debt would be "at call"

I think some of you guys need to start putting yourselves in the position of the audience I am writing to - PPOR mortgage, handful of modestly yielding INV properties with I/O terms expiring at some point in the next 2,3,4 years... no significant wage growth on the horizon. Combination of low I/O rates and a little bit of help from the taxman is the glue that holds it all together. So while it may not be particularly relevant to either of your personal circumstances, for that kind of reader, having a property that generates an additional 7,8,9K per annum is going to prove valuable. In the short term it will allow them to get rid of some debt while they have the benefit of I/O , and beyond that it will allow them to have at least some defensive cash flow available to deal with the inevitable jump in repayments that they will face down the road.

This never ending focus on growth is fine, but it ignores the fact that for many, holding on is now the prize. It also assumes that growth will just soldier on , following similar cycles to the past - I think its warranted to question the validity of that assumption in a credit environment that is deliberately being contracted. Let's not forget that 46% of all loans are I/O right now, down from 53% just 3 years ago.... and that now has to drop to 30%. That means that at least one third of current I/O borrowers face repayment increases when they are forced to P&I . And that's a conservative figure, as it doesn't allow for demand for NEW I/O lending , which also has to fit within the 30% quota. I would argue that almost 100% of existing I/O borrowers will end up facing P&I repayments at some point in the next few years as I/O terms expire. And because that pool of borrowers equates to 46% of current borrowers, in very simple terms almost half of all borrowers today will face big increases to their repayments in the next few years, even without any RBA increases. All happening at a time when wage growth is basically dead.

So yeah, I think there's an argument against historical cycles being repeated in such an environment. And therefore, a very strong argument that whilst not relevant for your circumstances, additional income will be most welcome for others with lower incomes or less mature portfolios - if for no other reason that to help protect what they have. No different to any other insurance policy they have in place.

So while it's all well and good to talk about business opportunities which by your own admission are not for the average punter, or share market diversification which is just not accessible at any scale for the average punter, it's just not relevant or helpful to many readers.

So I'm talking about something that can actually help. Would I prefer there was more 300 or 350K NRAS available ? Sure. Or that dual occ could be done in Sydney for 500K? sure... but I dont live in fairyland. I live in "I understand whats coming and called it way before you did" land... and work with whats available to put hedges in place for my clients. Not perfect, but certainly helpful and certainly better than waiting for the P&I cliff to take away what many have spent years accumulating.

 

This is what I keep getting at though, what you are proposing at best is short term fix that could turn into a bomb for these people in 5 years time.

If they have for example 1 million of interest only debt that they can't refinance and will have to go P&I in a few years (begs the question how can they take on more debt if they can't refinance?) how is taking on an extra 500k debt now going to help them beyond 5 years? One would assume this new debt for the dual occ would also need to go P&I after 5 years? So in that time best case they have paid off around 50k (5 years x 10k cashflow) of deductible or non deductible debt and they are then back at square one, probably even worse off because they now have even more debt going P&I.

This is all based on the assumption that growth and rent increases will be at best minimal in the next 5 years. If we had a good period of capital and rental growth it could be a good strategy. Hard to see that happening though from where we are now.