Grow Capital First

Discussion in 'Investment Strategy' started by MTR, 29th Apr, 2016.

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  1. ellejay

    ellejay Well-Known Member

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    Agreed, I haven't managed it in Oz. Haven't tried because I saw easier opportunities elsewhere. Hopefully one day,..I've got an oz ip I'd love to keep hold of but the yield is meh :(
     
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  2. MTR

    MTR Material Girl Premium Member

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    Yes, this.

    So what is the quickest way to build capital, booming market of course. What if the boom is over?? find another boom market?? What if there is no booming market?? Try to add value either renovate or develop? However, I think this has risk when markets are flat or falling.

    I have a theory go for suburbs/areas which is in FHB territory, near rail with great infrastructure in place. Its a numbers game and that is it basically. Also reducing risk if you buy in the lower end because you probably have a much better chance of holding the property if you can not sell.
     
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  3. Ace in the Hole

    Ace in the Hole Well-Known Member

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    Be in control, don't be controlled.
     
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  4. MTR

    MTR Material Girl Premium Member

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    .... moving forward with the theme ..... Grow Capital First

    Anyone manage to do this over the last 4 years, we have had some amazing property boom cycles in Australia and anyone who focused on capital should have made a nice tidy profit....

    Now what to do with the capital moving forward?????

    Personally I am turning my capital into income streams, this way
    How I increased my income
     
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  5. BLT

    BLT Active Member

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    Reading through this and also some of the low-income (85k, wife, 3 young kids) - would it be better to use savings (45k) on renovating/extending PPOR (3-1 house, 460k LVR 75%) or as a 20% deposit for a lowish-capital, positive geared property?

    We’d love to add another living area (maybe a granny flat??) to the PPOR.

    My main concern is being able demonstrate cashflow for the banks but also understand the need to grow equity/capital too.
     
  6. euro73

    euro73 Well-Known Member Business Member

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    Over 2 decades or more, a myth developed in Australian investors minds that equity equated to borrowing power. It was always a myth, but it found itself a home in the Australian resi psyche because of servicing calculator policies . Those policies made it "seem" as though equity resulted in borrowing power. Why? Because policies like assessing existing debt without any buffering, accepting all secondary income sources at 100%, using the Henderson Poverty Index for living expenses etc, meant that debt to income ratio's were constantly expanding. Combined with falling rates, it meant that everyone could borrow more... year after year after year ... which meant prices rose...which meant equity was created... but also meant that once you got that equity you ( and everyone else) could generally access it quite readily... It was all about the servicing calcs. Since deregulation in the mid-late 80's we have seen a 25-30 year period where we went from being able to borrow 3.5 x income to being able to borrow 15-20 x income.

    That's all over now... each and every one of those policies has been curtailed or ceased. We arent going back to 3.5 x income, but we are going to be capped at single digit multiples , so the era where everyone could borrow more money tomorrow than they could borrow yesterday is over for the time being as APRA pursues policies designed to deleverage borrowers , rebalance the P&I v IO ratios and starting in 2018, reduce debt to income ratios over time. So I dont see how growing capital assists with borrowing more money in that environment. Its wonderful to have lots of equity for sure, but it no longer equates to borrowing power.

    What does improve borrowing power is either yield or debt reduction. Now yield would need to exceed 10-12% to start improving borrowing power, so thats not realstic until you have owned a property for 15 years or so... but that doesnt mean cash cows cant be employed smartly to reduce debt for a few years....

    I see very clearly is that reducing debt does two things simultaneously

    1. it creates equity
    2. it improves borrowing power over time.

    Slowly, yes... slower than many are happy with, yes.... but the two facts above are correct nevertheless. neither of these outcomes will happen quickly. You need a lottery win or an inheritance for that kind of fast outcome.... or to sell something - but if you wish to buy, hold for the longer term while you wait for rents to mature and replace your salary ... you need a cash cow or two in the mix so you can deleverage a little as you go...

    Growth will come eventually.. but its going to come slower than it did in the past because of the changes to borrowing capacity. Thats just how it will be unless we have massive wage inflation or APRA unwinds their policies... both are unlikely to happen.
     
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  7. euro73

    euro73 Well-Known Member Business Member

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    What are the council requirements for granny flats in SA?

    My understanding is that most SA councils only allow Granny Flats if parents or teenage children live in it . They cannot be built as an investment option. Same problem as VIC, where they must be used as a Dependent Person Unit .

    Are you aware of any SA councils where they allow a granny flat to be built and then rented out ?
     
    Last edited: 29th Dec, 2017
  8. BLT

    BLT Active Member

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    We’re thinking long term and not anticipating an early retirement, just making sure we can prepare over the next 30 years to be positioned comfortably.

    It sounds like paying down the PPOR debt and looking at debt recycling could (and maybe looking at other ways to increase cashflow in the short/medium term) be the key if that’s APRA’s focus

    Do we have any specifics of what debt/income and P&I/IO ratio APRA is working towards?
     
  9. euro73

    euro73 Well-Known Member Business Member

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    They have set an IO limit of 30% of new lending - effective July 1,2017.

    IO levels had been at 53% of total lending in July 2015 , when APRA Round 1occurred. APRA Round 1 involved the 10% IO speed limit, the sensitised assessment rate and a minor focus on higher household expenditure measures

    IO levels had reduced to 46% of total lending by July 2017, when APRA Round 2 occurred
    APRA Round 2 involved the 30% IO limit, and they have also jawboned that further work needs to be done on properly assessing Household Expenditure Measures throughout 2018. But they appear by and large to be satisfied with the general direction of things.

    What we don't know is whether APRA's end goal is to reduce IO volumes to 30% of total lending or not. That would obviously take quite a few years to achieve - potentially 7,8,9 years They may just be seeking to get IO volumes down to 35% or 40% of total lending, and then maintain those levels. That may only take 4 or 5 years. I personally suspect they are moving towards a 35% range as a general goal...only because that's the traditional level that Australian banks have operated at since deregulation... but they will be "relatively" flexible from here on I expect . By that I mean, provided they see IO volumes continuing to fall and provided they see lenders genuinely assessing real household expenditure when determining borrowing power, I dont expect to see any more APRA intervention. They have made it clear they dont wish to be any more hands on than they have already been, and want the banks to carry the responsibility of doing the right thing, moving forward.

    For the banks, this has presented an opportunity to reprice their back books and make the same margins by writing fewer IO loans, while also de-risking their books.... so everyone has ended up happy.

    End result.... dont expect any major reversals of these policies. The banks profits arent suffering and their books are being made safer. Banks being banks - ie banks chasing profits - has been one of the arguments the anti APRA brigade have been using to make their case as they try to convince themselves these changes arent real and that old cycles will repeat. Keep Calm - you cant fix stupid :)

    Expect lower debt to income ratios to be the new norm. In fact- expect a renewed focus on even lower DIR's throughout 2018. How do I know this? The APRA chairman said so. Several times. At industry events. Just a few weeks ago. The anti APRA brigade, who continue to argue that equity equals borrowing power and that old cycles will repeat, are in denial here as well. Keep Calm - you cant fix stupid :)

    Expect less/slower growth and absolutely expect "cycles" to be redefined. This is only common sense. When less fuel is available, the fire cant burn as brightly.

    Expect debt reduction to become a far more popular strategy.... eventually...when the easy growth and "cycles" fail to appear. This is the psychological battle ground where people are fighting with themselves right now. They know that mathematically a cash cow/debt reduction strategy is the right move. They see the writing on the wall. The dots all make perfect sense , but that final act of connecting them is just proving a bridge too far. Letting go of a growth focus is just proving too difficult for most. Recalibrating to adjust for 5 year IO terms and slower growth cycles is just proving all too hard for most. But eventually, when the masses finally cotton on and the penny finally drops, it will all seem so bleeding obvious. Unfortunately it will take a few years for the masses to realise all of these things. The herd always takes a long time to catch on. They have no idea how servicing calculators used to work, nor how they now work. ( gee, many of the big fish here still dont get it after all) All they ever knew was that Mum, Dad, the neighbour , the cousin and that guy from work all made a killing in property ... or at least that what they were told ( its funny how few people ever actually retired from all that easy growth though , isnt it? hmmm ) and all they ever knew was that credit was easy and plentiful. So unless they are actively trying to borrow now, they could conceivably have no idea these changes have even occurred.

    Get ahead of the curve. When the penny drops - and it will in the next couple of years - properties with yield will be far more sought after than they are now. Its only common sense. This doesn't mean growth wont happen. It will...but it will be slower. What it means is that mathematically the calculators have changed and you cant access equity as easily any more - if at all. Investors borrowing power has generally speaking been reduced by @ 50%. Which means growth of itself - without debt reduction - doesnt improve your borrowing power. You need to be actively reducing debt - ideally non income producing non deductible debt such as your PPOR mortgage or car loans or credit cards..in order to improve your borrowing capacity. And it will take time. It is just like a dividend reinvestment plan. The results dont manifest in a year or two... it takes several years of disciplined dividend reinvestment before you start to see results. But its either that, or hope APRA reverses its policies... or hope you strike gold or win the lottery.
     
    Last edited: 30th Dec, 2017
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  10. C-mac

    C-mac Well-Known Member

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    ^^^^^^ This.

    I've already been on the yield 'bandwagon' for about 12 months now.

    To me, debt reduction at this point is the key priority, more so than portfolio expansion and capital growth value-increaes of existing portfolio.

    Not only to reduce my overall portfolio risk level (and thus build in a 'safety net' as it were); but to also as a tactic in my overall long-term property ambition of having my portfolio pay me annually a basic living income; a baseline income if you will; to free up my time to leave the full time corporate world where I fulfill other people's retirement ambitions; to (oftentimes) the detriment of my own ambitions.

    Having a baseline living income (and a fully owned-outright PPOR to go with it); means that I could truly choose to do what I wanted as a job, out of passion, regardless of how poorly paying that passion-job was! E.g. being a scuba instructor, or tour guide, or national park ranger, or botanical gardens maintenance person. These are all truly jobs I have wanted to do, over the years, simply out of the life-passions I have that relate to each of these jobs as interests or hobbies. But, I had dismissed each and every one of them when I'd found out how poorly they pay. So, I then became a corporate world slave. I love my dayjob in the corp world dont get me wrong, but I cant do that forever. Life on this planet is too short and finite to not pursue other dreams.

    But, imagine having a baseline income of say $40-$50k that your porfolio provides you, by the time you hit your 40s. Then, you can go do whatever - become a scuba instructor in the tropics for example - and even though that scuba job might only pay 40-50k per year on its own; when added to your residual portfolio income; you end up doing fine over the year; but in a much more enjoyable passion-based job (and perhaps for some, in only a part time e.g. 3 day a week job, or perhaps full time but only 8 months out of 12 worked and 4 months relaxing/holidaying...).

    So, I am using my remaining years of 5-year-IO mortgages (for those loans I have that are still this type; others have already switched to P&I on cheap-and-cheerful low low interest rate deals that lured me...), to aggressively fatten up each of the offset accounts attached to these loans. This means that during the 2-4 or so IO years remaining that I have left on these bad-boys, I'm minimising interest paid, then saving those 'saved interest' portions for the time when the IO-period 'party' is over for me. Sure, at that juncture I'll move to P&I (and possibly at higher interest rates than today), which will sting a bit, but I'll have those offset account coffers ready to go, to help cover/carry this weight over the next 4-5 years of aggressive P&I paydowns. What I'll probably do by that point is then refinance just one of the mortgages to another lender (any lender really at that point who will have me specifically for another 5 year IO period - doesnt matter if the interest rate is on the high side, read on to find out). Ill do this for a property that I'll still take out a 25-30 year mortgage for; but will be 100% intended to sell down after or around that 5 year-IO expiration period expires. What I'm doing here you see is aggressively paying down my 'hold all the way into retirement' meat-and-potatoes portfolio whilst paying minimal interest the whole time due to above strategies; using this one property (strategically I'd select the weakest-performing in my portfolio that I intend to offload within 5 years) as a strategy to soak up the 100% offset goodness that the high yield from the retirement-portfolio will start to deliver. Thus very much taking advantage of father time and Einsteins concept of compound / cumulative interest over time.

    I probably didnt explain this very well but it is sorta my new game plan for the next 5-8 years as I hopefully transition out of the full-time workforce.

    Oh and Im fattening up those offsets by any means necessary. Working extra time/effort at work to increase incentive/comms payments; bringing successes from my crypto endeavours back over to FIAT / AUD and into the offset; selling things I no longer need etc. etc.
     
    Last edited: 30th Dec, 2017
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  11. BLT

    BLT Active Member

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    Thanks for the great reply and info! Lots of food for thought. It does sound like they’ve taken some of the gloss off of the idea of starting a portfolio - but at the same time it seems understandable that they’re trying to reduce risk across the board.

    Being new to this, I’d be interested in hearing counter-arguments or other points of view too.

    Bit off topic - but I really like this goal. We have one income that’s definitely in that low-pay/passion-job. Being realistic with family, income and time, property as a passive baseline would be great.
     
  12. C-mac

    C-mac Well-Known Member

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    Thats it, isnt it?

    People often romanticise the whole "never needing to work again", but then what?

    No doubt if you are someone whos worked hard to get to that point, your hard-work ethos will probably mean that when you reach that point, you'll become... bored if you dont find other projects or new passions to pursue.
     
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  13. MTR

    MTR Material Girl Premium Member

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    I guess its about finding purpose in life regardless of whether you are retired or not.....ooohhhh that's deep:p
     
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  14. Jamesaurus

    Jamesaurus Well-Known Member

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    Play so much golf your off scratch?
     
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  15. sash

    sash Well-Known Member

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    You are on the right path...have a look at this strategy and this also uses debt recycling...

    Farmers Strategy to Build Wealth - oldie but goodie

    There are no magic bullets ....but you can based on market cycles buy a place (need to choose a better property) and once it grows say 60-100% you sell and take profit an repeat. You can still buy multiples but you need to sell to keep going...and move to the next growth market.

    So you buy quality (5-7 type) property and turn them over every 3-5 years...so picking the time in the cycle is important.
     
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  16. MTR

    MTR Material Girl Premium Member

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    This is what I like, timing the market, easiest way to make money.
     
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  17. sash

    sash Well-Known Member

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    It is not the easiet Strategy as it requires discipline and you need to be prepared to take lower profits a you can't always get the market at the very top.

    Having said that you can consistently make money....personally I am now doing a combination of buy and hold as well as this Farmers strategy (buy, grow, and sell to market). The fact that I have got so many loans also helps as I can recycle a lot of them....
     
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  18. MTR

    MTR Material Girl Premium Member

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    Makes sense. No one has a crystal ball as they say, but if you get in on a rise and pull the pin after a couple of years you cant go wrong, perhaps miss on some growth but the trade off is you don't get stuck at peak

    Different stroke for different folks, this works well for me, so if it aint broken don't fix it as they say
     
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  19. sash

    sash Well-Known Member

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    OK....agree.so if you extrapolate that strategy when do you think it would be time to pull up stumps in Atlanta?
     
  20. MTR

    MTR Material Girl Premium Member

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    I don't think I will be pulling the pin, I am continuing to buy.

    I am cash flow positive from day one. I have also stream lined the process in terms of managing property managers = more cash flow. Sourcing the right insurance at competitive price etc. Its been a work in progress that is for sure.

    In saying this as far as growth goes??? Inventory is at its lowest, my last deal was a town home/house and there were 10 offers on this property.

    What is driving this market is the strong economy, business friendly environment, I think 12? fortune 500 companies moved their business to Atlanta last year. Cheaper to do business in this State.

    I was told 10,000 people move to Atlanta each month. This combined with foreigners buying up, I don't see it slowing down any time soon? At least I don't see any signs at the moment.

    I think there are other States that would be worth researching that could provide significant growth and cash flow moving forward.

    MTR:)