Cash Flow Positive P&I Portfolio

Sounds good in theory sure. I’d be more concerned the type of asset you would have to buy to achieve a 7% yield. Typically you will have Very Very limited growth long term. Can’t think of anything worse than your IPs being worth not much more in 15yrs time.

If the budget is constrained, I’d sooner aim for 1-2 better quality iPs but employ the same strategy. Go P&I, rents will increase, it will eventually end up neutral anyway.

 

Example

IP1 $500k purchase CG 7% / 4% yield (Growth)
CG yr1 $535k. Yield $21,600
CG yr5 $701k. Yield $29,387
CG yr10 $983k Yield $43,178
CG yr20 $1.94m. Yield $93,219

IP2 $500k purchase Yield 7% / 4% CG (CF)
CG yr1 $520k. Yield $36,400
CG yr5 $608k Yield $42,560
CG yr10 $740k Yield $51,800
CG yr20. $1.09m. Yield $76,770

I would guess CG on 7% yield would be even less than 4% but this is an example anyway.
It doesn’t seem like a huge difference, 4% growth vs 7% long term, but the effects are massive when compounded which is why I will always pick a “quality asset” in a quality location Even if it means only holding 2 properties and not 6 As they out weigh CF+ properties by a mile long term.

 

+1.
Positive cashflow will need to be taxed, so much slower journey IMHO too. Compounding growth, is growth on growth rather than simple growth.
However, nothing wrong with wanting to pay P&I, I prefer IO and own few more IPs instead.
There are other ways to grow equity too, repayments, adding value with improvements, renovations, rental increases, depreciation, etc....

 

Sounds terrible to me. Relying on your own repayments to pay off your house. Might as well put the money in the bank. Less risk, less hassles.

Only makes sense if your buying in expected growth areas. But if you're just buying simply because it may be neutral CF then it makes no sense to me.

 

Think Gladstone

 

My experience suggests you need closer to 8% gross yield to break even with P&I.

 

True, not everyone includes all costs, some people go overboard and include maintenace

 

OP show us a property that you feel is cashflow positive
And we will give feedback

 

The tenant pays the house of though, I just hold the loan docs.

 

You need to take risk and opportunity cost into account. That's why it's important to have decent growth to justify that risk. That's my view at least.

 

I started off with this exact strategy in mind. First IP was a cheapie with a 7% yield (neutral) and paid it off in 4 years. Plan was to buy another one (which I did) and both lots of rent go towards paying the second one off and so on and so on.
Sounds like a simple, low risk strategy but the problem was I couldn't sleep at night because I knew that in 10 years time I'd still only own 2 IP's. I knew I was going to need a bigger asset base and this strategy wasn't going to do it.
Paying off a PPOR slows down your investment journey enough without trying to pay off every IP as well.

Willy

 

Didn't actually happen like you have suggested. Only RHG ( RAMS) got into any really serious trouble. Everyone else who closed shop here was really a mortgage manager funded from o/seas by people like GE Money, who withdrew funds here to plug holes there. No other lenders/originators of their own product or funding closed here due to an inability to fund their books - really , aside from RAMS it was only mortgage managers or those funded from o/seas sources who had issues.

There are a lot of myths about the credit crunch that followed the GFC - and this is yet another one. But the truth is that Australian lenders were in fact one of only two nations lenders who could continue to achieve RMBS refinancing at the time, because of the quality of the assets. Canada was the other banking system. Cost of funds went up for sure...but funds were available is the point. Westpac and CBA were still doing 97% LVR 12 months later....

That experience is really why APRA stepped in in 2015/16. They were extremely concerned that the quality of the asset ( Australian mortgage bonds) had deteriorated, with 53% of all loans on IO and headed to 60% +, and fast. If another credit crisis were to unfold, they were concerned Australian Banks would be unable to refinance 1.6 trillion in RMBS stacked with high LVR IO loans. That's also why you may recall hearing some people compare the risk IO posed to Australian lending as being similar to what subprime had been for US and European lending institutions , even though we didnt have their delinquency rates . They thought it posed the same systemic risk potentially, because it could cause funding to dry up ( hence a credit crunch) and if banks couldnt roll their bonds over, a calamity could occur that would require a 1.6 Trillion bail out . And while I think that was extremely oversensationalised, from an RMBS/securitisation perspective I get where they were coming from. The global markjets got really really picky and if that happened again , all tbat IO debt might not be to their tastes.... and these are the reasons why I think too many readers here are now overestimating lending returning to how it used to be.... they simply don't understand how funding for banks , who then lend money to borrowers - actually works. The money isnt from here...its borrowed by banks and then lent to you and I. That tap goes off and the whole show stops 2 seconds later. Most brokers don't understand how mortgages are actually funded either- its generally well above their daily pay grade. But people who understand it, understand we will never be allowed to go back to that level of systemic risk - unless the regulators are completely incompetent.

 

I specialise in this space, and I wouldn't consider 4-5% yields to be a cash cow. Its better than the vanilla yields many get, but its not quite enough. I would consider nothing less than a 6-7% starting yield to be a cash cow. This would enable you to comfortably service P&I and all expenses, and leave a little for extra repayments so that the property can be paid down inside @ 15-20 years. I don't believe you can get 6-7% with vanilla /single income resi properties unless you attach something to accelerate it like NRAS, or unless you buy in a high risk location like a mining town, or unless you buy something like student accommodation or a boarding house - but you'll face serious finance issues with those types of securities. The only way you can really achieve 6-7% in the resi space from day 1 without NRAS or high risk locations or difficult lending challenges associated with specialised securities is with dual occ, in my experience....

 

Or medium sized regional towns......but maybe you've included them in the high risk category!

Willy

 

No... the size of the town is less important than how many tricks it has. One trick ponies are risky whether they are big , medium or small. Multi trick ponies are less risky whether they are big , medium or small. If you are eluding to Orange or `Goulburn , where I am active ; here are some facts for you;

Orange has averaged in excess of 6% per annum growth for the last 20 years , and has never had a single year of negative growth during that time.

Goulburn has averaged in excess of 8% per annum growth for the last 20 years and has only had 1 year of negative growth during that time.

So medium sized regionals ( or those two at least) are not all at what I meant . I meant risky mining towns- just like what I wrote

 

Something to consider...


In the example above, how much did the investor need to top up IP1 by, year in and year out over those 20 years? Lets say it was 15K per annum ( $1250m per month) , as that's what the difference is between the two examples presented.
If that 15K had been available to spend on paying down PPOR debt instead of propping up loss making INV debt, how much interest would you have saved over the 20 years ?
It works out at @ 132K - see below.



But lets also consider P&I in all of this. If the IP 1 investor had to migrate to P&I after 5 years, their repayments would jump by @ 50%, so the 15K cash flow difference would become significantly more. But for the IP2 owner, P&I would easily be covered by the 15K of surplus , so they wouldnt need to put anything towards their INV holding costs. The owner of IP2 would be contributing an additional 8 or 9K and none of it would be deductible.

If the investor who purchased IP1 and the investor who purchased IP2 had the same incomes, which of the two would be able to borrow more money in 5 or 10 years? The owner of IP1 would have retired no extra PPOR debt and no INV debt. The owner of IP2 would have retired a decent chunk of PPOR debt and start paying down INV debt as well.... all without creating any additional household cash flow pressures. The IP1 owner may have more equity, but what good is that of they cant harvest it?

Its all well and good to calculate compounding growth ...but don't forget to calculate compounding debt reduction and the value it offers to borrowing capacity and holding cost improvements either

 

17 Karlson Street, Rosebery, Tas 7470

 

If we're calling Orange and Goulburn medium sized then maybe I should have said small regional.

I wasn't eluding to them at all, more so the areas where I've found those sorts of yields which are more 10-15,000 people.

Willy

 

that is 20% yield. But there are 20 units and it averages out to be a cost of $21k per unit, and they are selling them furnished too.
Would be difficult to borrow against. Location is a mining town.

Not something I would want to buy

 

Don't disagree, but pretty hard to imagine it wouldn't be cashflow positive! Well, at least until the mine dies...