Changing the Game as Finance Gets Difficult

If I assumed full potential rents (which I never do. I'm always erring on the conservative side) they would run neutral at @ 7.4% I/O from Day 1. If rents inflate just 3% per annum compounding , by year 6 years these properties would remain pretty much self sustaining even at 6% P&I.

However if I use upper range rental potential, in year 6 they run @ $1250 CF+ even at 6% P&I with 25 years remaining.





But if I refinance out after 5 years and get a new 30 year term, even if it has to be at 6% P&I, they run at over 3K CF+ per annum






Sure NRAS is better. Course it is. Fantastic, powerful tool- especially at sub 400K. Its why I concentrated on it first, and was such a proponent of its cash flow powers. But this is the next best thing. Wish it could be done effectively in big cities but it cant . Wish it could be done in all states - but it cant. So affordable regional NSW areas it is, where land tax thresholds can be well managed, and where the product is affordable and accessible to most. Debt reduction is still very powerful over 5 years. Not as powerful as 10 years, but certainly nothing to be sneezed at. You can always sell after 5 years and even if you made zero growth, you'd still have paid off a tidy amount of PPOR debt . How can that NOT be a powerful outcome either way?

Ive been in the lending game in pretty senior roles for a long long time, and I know my way around servicing calculators as well as anyone here .... and over the last few years lots of people have tried to have a dig, but none of them has been able to produce numbers that make sense to defend their arguments. And your negative 5-10K argument joins that list , unfortunately....

So tell me/us... what are the alternatives? Shall young investors sit around getting 3.5 - 4% rental yields on stock that they hope will deliver a quick few hundred K in post CGT profit before the P&I hammer falls, so some PPOR debt can be repaid that way? is that really the whole game plan? My problem with that entire philosophy is that it ignores the world we are in because it continues to assume there's big growth to be had in the coming years in spite of lower LVR's, higher rates and P&I becoming more the norm.

Does anyone really think that sort of thing is actually achievable for most young investors here, who are carrying PPOR debt and just trying to get some momentum going in their relatively young portfolio's? Gosh, you really have to wonder. If only 3 or 4% of investors got past 3 or 4 properties in the 20 year pre APRA era , when wages were growing, prices were lower, LVR's were higher, borrowing was far easier , servicing calculators took "actuals", 1 day no docs and 1 year lo docs were available, 105% LVR products were available, credit scoring didnt exist, and I/O terms were as long as you wanted them, how on earth do you think people will outperform those sorts of outcomes in this post APRA era where the opposite of every one of those things is now true?

Look, we will have to agree to disagree old friend. I believe firmly that a dividend reinvestment plan will reap the greater results in this much tighter environment, through the power of compounding debt reduction. Really wish there had been an NRAS 2.0 in the budget, but alas no... what we got was a 60% CGT "carrot" to try and encourage institutional investors to pay for affordable housing, where they cop a 20% rental reduction and get no com pensation for that other than a 60% CGT concession, rather than the 50% concession and the 11K tax free credit I get. Twas just about the biggest piece of policy rubbish delivered in living memory . So this is the next best option and I believe it will be almost as effective in helping people pay down debt. Even at its worst, under the stress tests you are applying, it certainly isnt going to do any harm. Its neutral at worst. So even if it only does 5 years worth of solid debt reduction rather than the 10 that NRAS offers, I'll still happily take that over weak yields and being completely and totally reliant on speculative growth in an anti growth environment, any day See I'm not after the biggest number of properties in my portfolio. I'm after the biggest net income from my portfolio.... and I know that in the post APRA years if I want to expand its footprint and hold it for long enough for that to happen, I need to do more than hope for pots of growth at the end of the rainbow. I need to actually work towards manufacturing the outcome with some debt reduction as well. I need to get rid of the PPOR debt and personal loans and car loans and HECS debt and all those other things that cripple borrowing power.

 

I feel the same way as well but I think the best way forward is to maximise the potential of the current assets by maximising the potential rental through cosmetic renovations and if applicable to do a garage/granny flat conversions. That's what I am aiming for so that I can increase my cashflow and if the loans do convert to P+I, I do have the funds to make the difference. I still have a couple of years to go before the end of the first 5 year interest only loans but not going to assume that it's going to be an easy extension for another 5 more years.

 

Hey MTR & Sash,
Great to see experienced property investors diversifying to other asset classes. Have you always done this or is it a recent direction because property doesn't offer as much value as it has previously?
You both talk about a crash or dip. What are your thoughts on the current levels of the All Ords? Is there a retreat from these levels or does it go to 6,500 before a crash and then it only comes back to current levels only and you have spent time sitting on the sidelines?
Interested to hear your thoughts and experiences.

 

No Idea on share market, just waiting, its been a bull market for a while now, once it corrects I will be buying.

 

Guess my McGrath shares is going to get a further hit with the harder lending market. I am grateful that I was able to make purchases to properties prior to the APRA intervention and when the market was more reasonable. Could be an opportunity for me to enjoy life and concentrate more on further studies and my career. Some of my colleagues mentioned that once they've paid off their PPOR, it seemed like a great burden off their shoulders. One even mentioned that the bank manager spend 30 minutes trying to convince him to keep the account open and use the equity for further renovations, extensions or a holiday.

 

the share market will come off at some point usually there is some shock which causes this.

i had shares via super and a small portfolio the hard lesson iearmt over the years is to buy qualty companies

 

was the last share crash 2008 GFC??

 

no there was a massive dip in 2015 to 2016. for example i bought cba at 73. also wiolies at 22 dollars. this 5he time to buy

 

kriscutt....on zhis we are in violent agreement

 

Nice work Sash. So hindsight vindicates that it was the time to buy given it is now at $80.
From here can you see it going back to $90 or $70? If it goes to $90 do you see it as a missed opportunity? Or if it goes to $70, what stops it here and prevents a free fall to $60?

 

i dont worry about that as much by buying in significant dips say 10 to 20 drops in the markey just drip feed finds. iver the long term it evens out. just buy quality top 20 in australia which supply essential services i.e. banks telcos retailers etc

 

Right in the feels

 

You're gonna buy shares? Times are changing. What will you buy when it happens?

 

Property in US first, read my last post, I don't know too many investments where you can double your money in 12 months and have cash cows
US - USA Property Investing

 

Doubling in 12 months,crazy. Sounds like you need to take the profits and run

 

No way, why would I, firstly I have cash cows, where would you get this income in Australia.

I think perhaps some markets Australia have more chance of tanking than US?? time will tell

The market started rising in 2011/12 in USA and not slowing down.
I purchased this one for $48,000, click you will find evidence on this link I think 2011
Now worth around $168,000
5778 Belmont Ridge Cir, Lithonia, GA 30038 | Zillow
More than tripled in value and still going up.
I don't see US property market slowing down because the inventory/stock is too low, its a major issue in US when talking property.

Its not like Australia, USA allows foreigners to buy property, no rules and world is buying up, too much demand and while the economy is growing it will just continue to rise. This is what I am seeing.

 

I just find US a bit too far to own and manage one but you seem to have all systems in place! Good on you!

 

Glad you posted this @euro73 - thank you. I've done a similar exercise with a portfolio of NRAS and it stacks up ever so well under extreme stress testing - the value of the asset rises in times of uncertainty. Would be nice to have another similar vehicle, certainly. I suspect the NSW budget may have something for you to lick your fingers about. Fingers crossed anyway, it seems more necessary than ever right now.

Its worth talking about the safety of yield and what it can do for you. In times of uncertainty, yield and cash become more valuable. Times are becoming more uncertain, so they naturally have a stronger role in portfolio management. Your also right, there aren't too many safer investments than a 7% yield with depreciation benefits to individual borrowers liquidity. Compare it to buying a premium Sydney INV at 1.5mill at 3% and you know which asset is riskier on cash flow.

Nonetheless, these real cash flow numbers presented, while OK, aren't really anything to sing home about in my opinion. If these assets grow thats where the real value is, and scope to reduce debt over time via sales will be larger than relatively minor cash flow benefits. In your own spreadsheet, the majority of the return is actually capital after 5 or so years, not cash flow. Thats where the real reward is IMO.

 

Only when assuming 6% P&I. And only when considering the property in isolation, rather than considering the property and its dynamic impact on your portfolio.

These properties run CF+ PRE TAX, not just POST TAX. In other words, these properties arent just producing 8-10K CF + per annum to be used for PPOR debt reduction. They are also saving you from forking out 5,6,7,8K in pre tax losses , which is what occurs on "growth" properties yielding 3-4%. So the cash flow differential is not 8-10K during the year, its far greater than that. With an additional 5,6,7,8K of money available to you during the year to use towards PPOR debt reduction, rather to use for holding a "growth " property until tax time, that' s 13 -18K that you have at your disposal during the year to use towards extra repayments for PPOR debt.

As I have always said, I err on the extreme side of conservative when I model these things, to try and keep as simple as possible for people. But when you mine down a little deeper, they are actually everything I say and more. The total benefit to your PPOR debt reduction could in fact be as much as 75- 100% more potent than I promote

The whole is indeed very much greater than the sum of its parts ... so I would urge that you have another think about the total cumulative impact this strategy offers... particularly where 3 or 4 of these properties sit within a portfolio. You could be looking at a pre tax cash flow differential approaching @ 40 - 55K per annum with 3 of these instead of 3 growth properties yielding 4% , or @ 50- 70K per annum with 4 of these instead of 4 growth properties yielding 4%. And that's why I disagree when you say they arent effective for PPOR deleveraging. An awful lot of PPOR debt reduction can be achieved in 5 years with that sort of surplus cash flow .

Here's the stress test you should be applying. There is no stamp duty to pay on these. So even if you only got 5 years worth of "bang" out of them as you suggest would be the case, and sold them and got zero growth and just got your money back, you'd still be well ahead of the curve just because of the PPOR debt you have paid off. Waaaaay ahead.

Seed costs at 80% LVR are @ 106K + construction interest + legals. Call it 115K. So 8-10K back from 115K represents an 7% - 8.7% return , which improves when that 8-10K is reinvested towards debt reduction.

Seed costs at 90% are 12% + construction interest + legals. Call it 72K. So 8-10K back from 72K represents an 11% - 13.9% return , which improves when that 8-10K is reinvested towards debt reduction.

So for someone with a PPOR who has between 72K and 115K of equity and the necessary borrowing power, this is one clever way to get that PPOR debt gone quicker.

For someone with double that equity and double that borrowing power, its even more powerful for getting that PPOR debt gone.

And so it goes...

#alotcanbeachievedin5years