Cash Flow Positive P&I Portfolio

Discussion in 'Investment Strategy' started by DueDiligence, 3rd Feb, 2020.

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  1. DueDiligence

    DueDiligence Well-Known Member

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    I'm sure this has been discussed to some length but keen to hear thoughts on the this as a strategy;

    - Buy cheap (ish) IP that's cash flow neutral or positive on P&I , yield 4-5%
    - Use P&I driven equity to finance subsequent properties purchases.
    - Slowly accumulate properties on this basis, ensuring each purchase is backed by real equity from principal reduction on previous properties.
    - Sell out at a later date to unlock , time-frame +20 years.

    Capital gains are not expected but welcome hence P&I approach, the real gain is in having the rent pay down the asset with little commitment week to week from my own pocket.Over time, the property becomes more cash flow positive as the principal reduces and the effective yield increases. This is ofcourse more valid with rates stuck in the gutter and becomes unpalatable (and difficult) at higher mortgage rates.

    Is this a proven strategy as opposed to pure neg gearing IO capital gains seeking speculation.? I cant see how it can fail if the yield is right and the principal is paid down over time providing there's enough liquid cash in an account to cover occasional vacancy.
     
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  2. Trainee

    Trainee Well-Known Member

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    Did you figure out this strategy from a starting point of you dont want to put in any more money and you dont believe there will be cg?

    or do you genuinely think this is a better strategy?

    what would have been the result if you had used this strategy 20 years ago? 10 years ago?
     
  3. Travelbug

    Travelbug Well-Known Member

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    4-5% yield will not be neutral, let alone positive on P&I.

    Even with a higher yield it's a slow journey, without CG.
     
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  4. DueDiligence

    DueDiligence Well-Known Member

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    Mortgage of 280-300 k , rent of $350 p week , yield say 5-7% , will this not be neutral ?

    And slow is fine still isn't it, the house is being paid off
     
  5. Trainee

    Trainee Well-Known Member

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    3% pandi would be about 5% repayments. Plus 1.5% costs? So you would barely break even at 6.5% yield.

    How slow? If you plan is maybe two, three paid off cheap ips after 30 years, go for it.

    nothing wrong with being conservative with simpler goals, but its hard to say that is ‘better’ than aiming for growth and more assets/income. Not even sure that deliberately hamstringing yourself by avoiding growth is smart either.

    you might be safer always driving at 40km, but what if it means you are late for everything?
     
    Last edited: 3rd Feb, 2020
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  6. Trainee

    Trainee Well-Known Member

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    280k mortgage would be about 14k pandi repayments. 17.5k rent. Less expenses. Rates, insurance, etc.

    Barely neutral.
     
  7. DueDiligence

    DueDiligence Well-Known Member

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    Perhaps the next decade wont be like the last, so, in effect, investors should aim to pay their houses off.
     
  8. Trainee

    Trainee Well-Known Member

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    you say this based on your experience and how many years of successful investment decisions?
     
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  9. DueDiligence

    DueDiligence Well-Known Member

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    Lol, with or without skin in the game I have the same data as everyone else and the benefit or macroeconomic hindsight (like everyone else).
     
  10. Trainee

    Trainee Well-Known Member

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    What you dont have is the experience of how things looked during the gfc and how things turned out, for example. When it comes to the crunch, its not data, its character.
     
  11. DueDiligence

    DueDiligence Well-Known Member

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    Explain further please?
     
  12. Trainee

    Trainee Well-Known Member

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    GFC. Equities crashing 50%+. Big, overseas banks going under. Australian lenders actually closing down because they cant roll credit lines. Unprecedented everything.

    There is no benefit of hindsight here.

    What makes someone buy or just hold in those circumstances? Stupidity. Guts. Faith.
     
  13. kierank

    kierank Well-Known Member

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    @DueDiligence, I assume you are aware that growth/capital gain in not taxable (until one sells)

    whereas

    (rent - expenses) > 0 is taxable each year and the “P” component of P&I is NOT tax deductible (only the “I” component)
     
  14. DueDiligence

    DueDiligence Well-Known Member

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    LVR.
     
  15. DueDiligence

    DueDiligence Well-Known Member

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    Yes, I don't know exactly how that would play out on my tax but its a valid point.
     
  16. kierank

    kierank Well-Known Member

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    Well, you need to understand this.

    Set up two spreadsheets, one with say 3% income and 6% growth AND the other 6% income and 3% growth.

    Compare the two scenarios (after tax), after 10 years, after 20 years,, ...
     
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  17. The Y-man

    The Y-man Moderator Staff Member

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    So really the only point of having this investment is to get 4~5%pa

    Why not do some other income strategy like A-REITs to get say 5%~6% with no need to get loans yourself, and possibly better liquidity?

    The Y-man
     
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  18. DueDiligence

    DueDiligence Well-Known Member

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    I don’t know much about them but I’ll check it out thanks.


    Isn’t it a good thing though that essentially someone is paying down an asset for me whilst I just hold the loan documents (assuming netural gearing). What am I missing here?
     
  19. The Y-man

    The Y-man Moderator Staff Member

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    The efficiency (total return rate) and risks such as vacancies.

    For example, a unit in a well chosen reit will mean you have part ownership of several commercial properties in some good locations with a good range of tenants. Commercial tenants aren't protected by tenancy laws, so landlords can be quite draconian on them, as well as locking them into long leases (with annual increases).

    While the liquidity of many unlisted reits can be as bad as a resi ip, you can choose to trade off some of the performance and lower risk for say listed ones.

    Check out
    Unlisted Property Trusts [Property & Infrastructure Funds]



    The Y-man
     
  20. The Y-man

    The Y-man Moderator Staff Member

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    It's not a bad thing - just hard to find. We have two villa units that were like this - cost us $280k each and getting $300pw in rent at the time.

    But we also aimed for CG when we bought them - and happily they are worth $450k~ish now (but the rent is still around $350 pw)

    The Y-man