Consolidation phase - how to?

Hi,
Over the past 2 years my husband and I have reached our goal of 8 properties bringing in $150k rental income which is great but I'm now stuck on how to pay off the debts on these properties. Banks are tight these days so really only lending us money if a property is cash flow positive. As a general rule cash flow positive properties don't give us the quick capital growth that we need to pay off our existing property base.
What would you recommend our strategy be to pay off the debts? I'm thinking of a small subdivision? But I've never done anything like that before? what are people's strategies to quickly pay off the debts?

 

Sell your lowest yielding properties with the highest equity available? That's my strategy anyway.

 

^ ^ this. Most seem to sell 1/2 to outright own the other 1/2. But seek some professional advice as there will be CGT implications to be minimised.

 

We have only bought the properties in the last 2 years so there isn't much equity in them yet. We could go down the route of buying another batch of properties and waiting for the capital growth over the next 5-10 years but we are looking for other quicker "manufacturing profit" options?

 

Ah with property you don't do a 2 year acquisition phase and then move straight into a consolidation phase. You hold for a full cycle now instead.

So your question becomes "How do I make money?"
Renovate to add value
Subdivision
Development
Start a business
Get a better paying job etc.

 

True, perhaps I was misleading in my question. I'm not wanting to sell any of the existing ones, just how do I go about paying off the debts - or in your words how do I make more money.
Have you had much experience in subdivisions?

 

Quick profits might be more risky but the general advice is:
1. buy under market value
2. buy with a opportunity to add value: renovate, retain and build, demolish and build

For example, if you buy a 3x1 that has the opportunity to convert to a 4x2, the 4x2 will generally be worth more. Due diligence required.

 

When people think of these ideas, have they never found/thought that property is a get rich slow scheme ?

Increasing income is about the only fast way, but that is easier said than done.

We are entering a stage when likely negative is the growth prospect for many places, so it depends on where they are.

Developing is risky too.

 

Hi, we are in a similar situation. The learning curve keeps going up!

Seems like you want to do a subdivision.

1) Read the LEP and DCP (assuming you're in NSW). If you don't completely understand it, see the town planner at council or private.

Need to know what minimum size lots when subdividing, whether carriageway/driveway is included in lot size, minimum frontage etc. Basically to see whether your land fits the criteria to be subdivided or not (but, sometimes you can bend rules).

2) Seek a good land surveyor who has experience in these sort of things and work closely with them. I've found that they are your best friend in getting the deal approved.

3) Get tax and legal advice BEFORE you start anything!

Other strategies we have earmarked for our portfolio later down the track:
- townhouse: get interior designer to recommend a cosmetic reno design, then execute reno when we see cosiderable difference between our property to benchmarks around the area
- Build a granny flat
- Structural reno: turn a 2 bed house to 3 bed
- Unit: Airbnb or rent out furnished?

Hope this helps, and good luck!

 

Don't pay off the debts. If the goal is retirement or stopping work you would want to continue saving in the offset accounts. This way when you do retire and start drawing down the money to live on the extra interest is tax deductible.

5 Living Off Equity Strategies to Speed up Retirement https://propertychat.com.au/communi...quity-strategies-to-speed-up-retirement.7409/

 

^^^ this. It's really important to get the advice before you even put the offer on the land. People are buying properties, developing them and then asking for the tax effective strategy. The tax effective strategy starts before you buy the land.

 

Also look into other asset classes that you could get into with smaller amounts. Would be good to understand about the balance between higher CG assets (make a profit, but then CGT payable on sale) as opposed to higher yielding assets that you may hold for longer but provide a steady additional income stream.

If the market has moved enough, would you not consider selling a property?

What is your final income goal? If it is $150K then after selling a property, you need to buy another to keep at that income level. Would you look at another so you have one in reserve to cycle through.

By the way, congrats on getting to stage 2!

 

Our final goal is $150k so if we sell one then we need to buy another one, which I'm not opposed to. Its a very steep learning curve and so many strategies on what to do next it's mind boggling!
- double the portfolio and sit on it for a full cycle then sell down
- buy Reno properties and sell down
- buy subdivision properties, develop and sell down
-buy subdivision properties and sell the vacant land without developing it

 

I have known a number of people, some with a lot of property assets, who during booms thought they would get into developing as it is easy money, right ?

Well, I know that each one that thought this was the ticket *ALL* lost money, one was wiped out, if the market turns, your a goner if you can't hold. With buy and hold you can time things and errors are no big deal, with building, timing is everything as is time to get job done.

It can be done, but it requires thought, and maybe some luck along with skills, even with small projects, seen a lot of people who thought it was easy, smart ones are the builders who take a % and do not have all the risk and funds tied up IMO. Do not get me wrong, I would still do it too, but I do not see it as easy.

 

Yep, some options. IMO Point one is possibly the 'riskiest' as you're leaving it to the market to do all the lifting for you (others have an element of manufactured growth so you have influence on how much the property is improved and therefore the profit - as long as you have bought in the right area for said MG strategy and you have costed it right!). @dabbler has provided some great comments about developments.

I would want to have one to two IPs (or more) above the $150K as what happens if you sell one, then it takes some time to get the next to get back to your $150K base income level, or one (or more) isn't rented for a period. I would go slightly above the base income needs/wants ($150K) so there is a buffer if you have to sell one, one doesn't perform, one has unexpected costs, also across a range of income sources (other asset classes, other forms if income). 2 years isn't long to understand how the properties perform across the full market cycle (rents having to be reduced to keep them rented, IRs rising, maintenance, vacancies).

 

Jeane if you did nothing extra but used the rents to pay them off or pay them down have you calculated how long it will take you to reach the desired income? Assuming rent rises.

Now if you paid $X extra per month how long.

It might be a matter of just going the old traditional route and paying the loans down (via the offset account).

 

^ ^ I agree with @Terry_w . You could pay P&I on your loans rather than IO, that way you own the properties outright in 25-30 yrs and you could LOR. Prices tend to double over a 10yr period for well located property. Rents tend to do the same. This is a low risk, long term plan to let the market do what the market does.

If you add development into the picture, the risk increases as others have said. You need to have a fallback position if the market moves against you (ie prices fall or stagnate or your subdivision say, gets knocked back). Your fallback position in this case might be to hold & rent out rather than sell at a loss.

 

Hi Jean
Well if most of these are houses one thing you could consider is a monopoly-style tactic to 'improve the herd' as opportunities present.
Keep watching each local market and eventually a neighbouring property will come up for sale. Grab that, and horse-trade another from your portfolio.
Do that four times in the next five years or so and without too much effort you've got the basics for some great value-adding projects just by employing your grey matter.

 

Some great ideas and strategies mentioned here!


One consideration - you mentioned you dont want to sell anything yet. I fully encourage you to maintain this line of thought. Knowing that lending is getting so much harder, even if you sell one to attempt to buy another (perhaps better, or dev-friendly) one; I am hearing many recounts in recent weeks of investors getting caught out.

As in, their broker/lender advises that if they sell say a $350K property to pay out the $250K mortgage (with the view to access the $100k pre-tax/costs equity, and to then access a fresh 250K loan for a new purchase), then they wont have issues getting a new mortgage again for $250K. So off they go and sell up the $350K house, pay out the $250K mortgage only to discover lending has suddenly tightened and they no longer qualify.

I personally dont intend on selling ANYTHING right now until we are through this tight-a**e lending loop (looks like itll be a few years more of this!).

 

Hi
What do you mean by "horse trade"?