Farmers Strategy to Build Wealth - oldie but goodie

Hi All

I call this the farmers strategy to build wealth. There has been a lot of discussion around the current borrowing constraints and the impact of people being able to build wealth due to the APRA restrictions.

Here is the premise of the strategy you buy grow CG....sell and repeat.:

1. You buy in markets which based on where they are in growth cycle are primed to grow
2 You still need to take a 2-5 year view
3. You buy a 5-7 type property to balance yield ...typically you should be able to get in at 5-5.5% yield
4. You set a figure when you sell the property...typically you set this at 6--100% growth before you sell. This typically works best on largest 8-10 largest cities in Australia. So lets say you buy something for 270k....you might set the dial to sell when the property gets to say 432k. You do need to monitor the market because it could still be growing fast before selling but at the same time don't get to greedy and miss the peak
5. Once sold you take the profits, pay the appropriate CGT and move to another growth market. You also move the loan via a security transfer so when you sell you buy something in its place. So the type of loans you get is paramount. Westpac has a good product for this and allows the loan to stay open up to 6 months once a property is sold ...but the caveat is that some of the sales proceeds have to be in a terms deposit whilst you are finding the property.
6. You do this all over again.

Sure this is an old strategy some people have used...and is more active. But with this strategy you could build wealth faster in the APRA constrained environment. I too am moving more to this strategy as I want to reduce my property holdings whilst taking profits along the way.

Happy investing in 2018!

 

During your hold phase, would you also accelerate growth through renovations (factoring appropriate costs for end price)?

 

Only if required.....but renos require extra capital.....which is hard cash.

 

@sash What’s a 5-7 type Property?

Thanks for the post!

 

No worries.

A 5-7 type of property is something middle of the road. So if you used the Brisbane market it would cost between 400-600k. Place like Rochedale Sth...parts of Redlcifee ...Strathpine...Kepperra ...Stafford Heights....Wynnum...Runcorn..etc. fit the category.

1-3 is place like Deception Bay....Kingston.....Woodridge....Caboolture....

 

What Wesuck promise and what they do are 2 different things. I sold a property on the promise that that the loan limit would be reduced but the limit could be increased to the original limit at any time one of the conditions was that I put money in a term deposit. They refused to increase the loan and only paid half the agreed interest rate. My biggest mistake was assuming Wesuck would be honourable. The property was CF+ and CG 60% in 2 years. Do not trust West Pac. or making decision on their promises.

 

Yes this+..... .

BTW......Does this mean the experienced investors should ignore cryptocurrencies or should we take a punt at this just joshing, have no idea about this stuff. Perhaps I am a fool and I should start reading these cryptocurrency posts.

MTR

 

I will punt about 10k...but no more...just before Xmas....watched the screens of lot of people in the office trading Crypto.....that to me is recipe for huge volatility....

 

This is very similar to the way that 'The Silent Generation' (ie my parents, aunts and uncles) built their wealth in their own houses. That is, they bought something small and run- down, paid off as much as possible and then up-graded whenever they could, possibly by building, until they were happy or out of their depth.
Considering lending criteria resembles the old days so much right now, it makes perfect sense.
Either change your strategy to suit the times or stick with your own strategy until times change again. Might be a long wait though.
In the current environment, less is more.

 

Yes nice post Sash, thanks for sharing. This ‘farming’ strategy kind of reminds me of some of the activity post-GFC with some of the commercial developers. I’m talking about large private companies who would build office buildings / medical centres / shopping centres etc, then stack them with tenants and hold them for the long-term and go again. Trouble is the banks were not lending for the new projects so to tap cash they had to flog some of these quality income-producing assets that they otherwise would’ve kept. Those johnny on the spot with dollars and courage were presented with some rare buying opportunities. I suspect a similar thing may happen in the resi space next 2-3 years.

 

another option is to buy properties where you can eventually develop and add value down the track, this could also speed up the process to the end goal. However, it will also come down to holding costs of the property.

 

Right - but still need that capital to get the development happening, right - but I guess you need to start somewhere right?

 

Yes, start small is my suggestion, perhaps a property where you can build at the rear. Either sell both, or sell the front and you use this capital to build at rear. New Property, depreciation could be 7k+ pa, turn it into a cash cow.

MTR

 

Can you still get these 400-600k properties with 5.5% yield today that you mentioned?
On re.com, other than Strathpine, they are all showing up at around 4% yield which is a world away from 5.5%

Actually, when I look at re.com, it is showing around 5% yield for most of those suburbs back in 2012 after 5 years of nothing from the 2007 peak. But even though it did not boom during the last 5 years until now, the slow steady creep up in price has been enough to erode the yield down to around 4%, and anyone who bought now or in the last 1-2 years would have a huge holding cost with 7 of these properties at the current yield.
For those who purchased back then, it works. For those who would have purchased in the last year or two, it doesn't look like it fits with the strategy you outlined.

Would appreciate your thoughts on this.

 

Good post - I'd agree very relevant in the post APRA world of finance.

I remember the good old days where you used to be able to hold the investment, refinance and use that as a deposit to purchase another one... but everything has changed now, so this model is very relevant for investors who have a portfolio!

 

Yes you can. Even some of the ones I bought required some minor work - i.e. painting and some maintenance to being them up to scratch. The one I bought in Strathpine was bought for 301k...without the work would have rented for 280pw...I did the work and it rents now for $365pw.

One the house is not always reliable...you need to do the hard yards and look at what it can achieve. Though you are correct getting past 5% is quite hard.

I did pick up the last one on Clontarf for 325k and it is rented for 355 or 360pw I believe. So th yield is something like 5.7%

 

What’s the importance of this step? What does the security transfer do that’s different?

 

It is just a swap of security...you release the old property and put the new property in....no need for a new loan so long as you borrow the same amount and have the 20% deposit.

 

Because APRA has made it difficult-to-impossible to borrow money if you already have a bunch of properties. Their rules are specifically to get people to pay down debt.
So if you have a big portfolio and sell, with their new rules you may not be able to borrow the same amount to buy again, which defeats the purpose of selling to buy something that can product better gains if after you sell you can not buy at all.
By keeping the loan and swapping the property it is against, you get to keep your loan without being forced to de-leverage when you may not want to, and can use that loan against an asset that could produce better gains than the previous asset.