Changing the Game as Finance Gets Difficult

I have been thinking to return back to flipping game where I started in early 2000s or maybe diversify more with Airbnb

 

How are you handling CGT @sash

Deductions via NG, pre-paying, etc..?

 

I feel like I've worked my behind off and sacrificed so much to have the portfolio i have today that selling will make me feel as if im taking a backwards step.

 

I had someone approach me today to settle within 2 weeks for an off the plan property - serviceability failed miserably.

Got another client with one coming up for settlement in July in Brisbane. He is trying to sell other property beforehand because he has no hope of being able to get a loan on the new one. I warned him too.

 

Its not the cash flow that offers the leverage. Its reinvesting the cash flow towards removing non income producing, non deductible debt and not having to sell properties to achieve that which that provides the improved leverage.

Capital growth is wonderful, but it gives you zero access to improved leverage unless you have the necessary borrowing capacity to take advantage of it. Otherwise, its only use is the post CGT proceeds from selling. But when you sell you don't just gain dollars from whatever post CGT profit you may or may not achieve, you also sell off the income, and the future maturing income. This robs you of the compounding income producing capabilities of a portfolio that's been allowed to mature.

What I do allows for accumulation and retention and debt reduction simultaneously, followed by further accumulation, without having to sell .

Look, everyone can debate the point all they want. But in the end, look at what Ive achieved using this strategy, and look at what many of my clients have achieved using this strategy, and more importantly look at the time required to achieve it versus the time the "big fish" on here who love the growth story to achieve what they have achieved and then tell me I'm wrong. Chasing growth at the exclusion of cash flow with which debt can be reduced, is fools gold in this environment.

@ redom you have known me a long time, and you know all too well that I dont argue the case for yield , just for yields sake. I argue the case for yield for the specific purpose of dividend reinvestment/mortgage reduction. If I was arguing that yield be used for daily living, you'd be dead right. But I'm not. I'm arguing that yield is powerful because it can be used for debt reduction.

Here's the thing, and as a broker I know you know this - doesnt matter how much growth you get if your 400,500,600K non income producing, non deductible PPOR debt is still hanging around your neck, and you are spending all available surplus dollars on sustaining your P&I loss making INV portflio, rather than spending it on PPOR extra repayments, resulting in bugger all being paid off that P&I PPOR debt during the first 10 years or so. Keyed in as OFI debt on any servicing calc today ( except Liberty or Westpac or Qudos) , 400, 500 or 600K of non income producing PPOR debt assessed at P&I 7.25% or more is a far greater impediment to borrowing power than not having that 400, 500 or 600K of non income producing PPOR debt keyed in as OFI debt.

I seek to remove that impediment. 2 -3 cash cows producing 8-10K CF+ per annum each will pay that debt off in 10-12 years or so. So while you might get your mortgage paid off if you can get 400,500 or 600K of post CGT growth across 10-12 years, you'll have had to sell the assets to do so.

But I'll still get the PPOR mortgage gone, with the key difference being that I'll still have the rental income from the ones I didnt have to sell... and they wont be yielding 6% of purchase price in 10 years time.

Re- run a servicing calc on that....

 

Is flipping even profitable?

 

I guess we will see a lot of stock coming on the market in future weeks.

 

Nah... its not as though all the banks closed their doors and all the tenants vacated at once. We will likely just see fewer speculative investors able to purchase and/or repurchase as quickly as they have come to believe they would be able to, because most have built a business model ( portfolio) that is easily susceptible to this kind of disruption. PPOR P&I borrowers arent suffering one iota. rates are still low. Banks are falling over themselves for those guys, and they make up 55-60% of all borrowers . Quite possible rates for P&I will get even a smidge lower even as I/O rates continue to climb. And then there's those investors with strong CF ( whether thats come about through holding stock long enough for previously negative CF to have matured to postive CF , or whether its come about by deliberately purchasing CF+ ) who have been busy paying down debt and accumulating strong buffers; they will also be just fine. They can adjust to P&I and fix their rates to avoid too much trouble at all, as required.

If anyone's going to be forced to sell, its those who are ignoring the need to balance their portfolio out with some defensive cash flow. But as most of them have been getting assessed for borrowing at 7.25% P&I or worse for the past 2-3 years anyway, I don't see that as being problematic in a huge way unless rates actually get quite a bit higher . It's going to be less a case of being forced to sell, and more a case of being unable to purchase anymore, no matter how good the growth is. Once again proving how little value growth offers during the accumulation phase, if cash flow for debt reduction is ignored.

 

Yep more stock to come on market for sure.

I'm selling off worst now, one now, another soonish. Get rid of the duds and improve the risk profile.

 

All the more reason why you need to be selective and pick quality....

 

You are a funny man...luv your work...

I thinking of getting out Lizzie also...a dead beat suburbs only a 50% gain after 10 years.

 

I am doing alright.....issue is how to get out and not get clobbered by CGT

 

Yep...mostly banks ...retailers...Telco...you know the stuff that Unlcle Wozzer (Warren Buffett) but essential service companies and you know what they do....

 

Generally only if market is rising

 

Sounds like a plan...you have to do something different now..

 

Combination of NB (due to high depreciation allowances, pre-paying and other deductions....still have to pay a but in tax..not way around it.

 

Only cos you have purchased in boom, when market turns you may understand the importance of taking profits. Sounds arrogant I know, but watch and wait, I learnt a valuable lesson many years ago

 

Agree 100% - your plan is far more sophisticated than most. Its impressive as it considers a whole wide range of factors and is tailored to the world we operate in today. I'm sure many on this forum respect your industry knowledge and planning (I certainly do).

The product you sold in the past (NRAS @ 300k) produces are different result to the product you sell today. Particularly when stress tested to a new finance environment. NRAS at 300k stands up to the test i put forward in my previous post - P&I @ 6% rates from years 6 onwards. Its still positive. Its immensely powerful. I know it because i own it (thank you again ). It is very much 'an insurance policy' in my own investment strategy.

Unfortunately, dual occupancies @400-500k - they fall over backwards when put under the same debt test. They aren't 'debt reduction' tools. They can't be. They don't reduce your total debt. They INCREASE your debt and they INCREASE your risk of payment shock as your cash flow will be negative once the debt rolls over to P&I at higher rates in 5 years time. When the debt eventually rolls to P&I and as funding costs continue to increase/rates rise over time, they only create more finance risk.

If the debt stays on I/O term, then its likely to remain cash flow positive. To keep the debt cash flow positive, its unlikely you need to employ a debt reduction strategy, as you will clearly still have leveraging potential to maintain its I/O status.

Agree 100% - mortgage gone, servicing up, big time. No arguments there. The analysis on deleveraging and now being the 'decade to deleverage' is spot on IMO.

Its always been about how you get there. I disagree that purchasing dual occupancies are a credible 'debt reduction' strategy.

Simply, these assets produce the following results.

• An asset that produces 8-10k in years 1-5. This is diverted to OO debt reduction.
• Once the I/O period expires, you then loses 5-10k in cash flow terms in years 6 and beyond. Every year. Depreciation benefits start dropping off to. Rates are likely to be a bit higher then too.
• Investors need to allocate ~$400-500k of additional debt take up to achieve above result.

My issue isn't necessarily with the properties themselves, i think they could be decent investments overall (I have very little knowledge on growth prospects of the regions these dual occ's are in).

The issue is claiming that these properties help debt reduction - the numbers do not follow this over a longer time frame. Years 1-5, sure.

Debt rises as a result of purchasing these. It doesn't help OO debt pay down in the long run.

In this environment, those with finance knowledge are spending more and more time educating people about debt and how to manage it in different environments. Your posts detailing the environment that we live in today are fantastic. Portraying dual occ's at 500k as a long term debt reduction strategy, unfortunately, that just isn't true.

 

Didnt you know ? property doubles every 30 years out here lol

 

With the sprukfest...I thought it would double in 5 years....how disappointing old boy?