Could a positive cashflow property be the right strategy for me?

Thanks for the response Kierank. Its great to read how other investors have progressed on their property investment journey and what did or did not work for them. The advise I got was the same, i.e. try to buy the best growth property I can afford and in 30 years with the current projections based on property portfolio only I should be able to replace my current income. It does not account for my share portfolio or other asset classes neither does it account for promotions etc. When the numbers came out I was a bit shocked to see how long the property would take to create some positive cashflow for me so I jumped on the forum to have a chat with people who have been down this road. Its been very educational and I am starting to get some clarity the more I read the replies and other similar posts.

 

Great detailed response and explanation Euro73. It gives a balance to the point of view Kierank has shared. The people who modeled my portfolio plan did ask me what I was planning to do with my PPOR and if it was my forever home. I am happy to stay here for now due to proximity to work and lifestyle features etc but would like to have to option of move overseas or interstate for a few years and convert my PPOR to IP, thus paying out the current loan was not suggested. Also in this case holding on to cash in an offset was suggested as a better option

 

Yes it does account for inflation, wage growth at the average industry standard and a higher interest rate, unoccupancy, maintenance, any upcoming big purchases or lifestyle changes etc. But it does not account for work promotion, stock portfolio income etc

 

Hi Stoffo, It was on the high side but looking back I think it was good as it put everything in one document and showed what my actual cashflow would be if i adopt this. The numbers are worked out based for my income, expenses and lifestyle and strategy suggested. I never knew there was such an active forum online where people have kindly spared some time to share their experience and point of view. I hope I knew this before may be I would have saved some $$ but it will be worth in the end if I choose and adopt the right strategy and implement it. I will take into account your suggestion and it will definitely help me in my investment journey.

 

Bad idea in my view. Punishes your borrowing power when you need it most, and for what? These property "experts" need to get their head around servicing calculators quick smart. Old methodologies such as those they are recommending do you a disservice in the post APRA environment. Used to be a great strategy...now its an achilles heel. And a large one at that. I get calls every couple of weeks from PC members who have had these sorts of discussions with property groups... I take them step by step through a borrowing capacity comparison and its like a light bulb goes off..... what becomes apparent after many of these calls and PM's is that many of these property groups have little or no lending expertise or have in house brokers with limited skills, and they still havent figured out how the new APRA world works... they are clinging to old methodologies . Its really quite amazing how poor that advice is for someone in your position.

Here's why... its as simple as this. Paying money into an offset does your borrowing power NO GOOD AT ALL. Diddly. Nil. Nada. Zip. You may as well have $0 in the offset as far as your borrowing position is concerned. Harsh, but true.

Paying down the mortgage DOES improve your borrowing power though - more than doubles it - and thats not a maybe. Its a definitive, unambiguous certainty..... and if you are serious about getting past 1 x PPOR and 1 x INV on an 80K income, that's your ticket right there my friend.... Especially on 80K .

And beyond that you then need to make that borrowing capacity work more effectively for you by using cash cows and dividend reinvesting for additional debt reduction rather than pursuing growth assets with weak yields that become your new achilles heel after 2 properties. This is how you get to numbers 3 and 4 without selling...thereby retaining the income stream to replace the 80K salary...

After that , in 4 or 5 years time when you have built your 4 cash cow portfolio that will then pay itself off over the next 15 years or so...... after you have no non income producing non deductible debt on your PPOR... then you can chase some growth assets. Thats when you can afford it. But not now. You have equity. Now you need to use it to turn it into income so you can own a 4 + property portfolio outright in 15-20 years .

And sure, that PPOR property "may" become an INV property at a later point ...but that's a maybe. At this early stage as you seek to get a platform built so that you can purchase enough properties and rental incomes to eventually replace your income in time and retire with comfort, maybe's are an indulgence you really cant afford. Not on 80K with a PPOR mortgage the banks still consider to be owing 360K on, which is getting assessed at something like 7.25% P&I and offers no neg gearing , addbacks or rental income to the banks servicing calcs. Not if you want to borrow more than 325K and get past one INV property.

I dont wish to appear harsh. trying to be helpful by telling you the reality of things.

Seems a no brainer to me

 

Thanks for honestly sharing your point of view. It not harsh at all and it does help me understand the different approaches I can take

 

It accounts for insurance costs as well.

 

I'm sceptical that a growth property could actually increase sufficiently in value over the long term sufficiently to make it a far better bet.

Property prices on the East Coast of Australia are already extremely high by historical and international comparison. Focusing on capital gains is taking a bet that they'll get significantly less affordable over time.

For example, thirty years of property prices rising by 7% a year, and wages growing by 3% a year would result in housing being (in real terms) three times as expensive as it is now. Or the average house in Hobart being a bit more than its equivalent in Sydney. Where's the money going to come from?

@euro73 strikes me as talking sense. Focusing on yield, paying down debt, and slowly growing a portfolio seems to be a sustainable strategy.

 

Thanks Graeme