Has the game changed?

I have been thinking recently about my own goals moving forward with property investing, I believe the majority of your success through property investing is dependant on you own finance structure.

When I started learning (4 years ago) the basic principles were fairly common.

Acquisition stage-
Borrow highest LVR possible, pay LMI, interest only loans, utilize offsets, when equity allows, rinse and repeat, using multiple lenders as required, capital growth properties.

To move forward in acquisition stage these days the same principles won’t get you very far, this left me wondering if these basic principles for people like myself starting out no longer apply.

To move forward now I think I personally would be much more successful with 20% deposits, P+I, high yielding property, possibly across 1 major lender, focusing on compounding debt reduction.
Potentially purchasing again when finance allows.
Almost sounds like the inclusion of consolidation stage into acquisition stage?

Are brokers finding that to move forward post APRA, investors are heading towards multiple loans with one lender with a competitive P+I rate?

Is this going to be the fastest way to accumulate property post APRA?

 

My understanding from my MB is that investors are now out of the market, in the main they are just accessing equity, those that can.

MTR

 

I still recommend using LMI to move forward more quickly, but much more P&I these days.

It depends a lot on the investor though and what their goals and plans are.

 

Not the case on my experience - although in Perth possibly the case.

 

Nice post. I think so.

But unpacking a few things:

- finance has changed, and theres less of a focus to 'fastest way to accumulate' attitude today. Fastest may not necessarily be best in times where credit is tighter.

- 'fastest' way to accumulate likely still involves older techniques if thats what you want to do. Preserve your deposits early, go IO, potentially fix to lower rates. You'll need this & access to non bank funding if you want to go 'big'. Risks are far greater & need to be managed.

- general sentiment and planning has shifted to sustainable investment acquisition, away from fastest possible.

IMO the last point is a good one. Most people aren't aware of the risks of large amounts of debt, part of the reason why you need regulators to shift attitudes/incentives around.

 

I can never understand why investors use the term "accumulating phase", call me silly, but why accumulate when markets are turning, easiest way to lose money.

Market conditions are critical when buying, accumulating debt wont make you rich if investors don't understand the basic rules of investing then what I can say, keep reading, keep learning. The end goal is to make money not to create stress.

Sorry, enough of my rant today.

MTR

 

This is just another of the cycles which have always been an element of property. Some are more seriously affected v's others Those that must sell are those most affected. Holding may be the right thing for others. What we havent yet seen is what occurs when rates rise 2% and a sustained lack of demand leads to reduced market prices. Those who bought in recent times may be most affected as they have yet to build real equity using strategies that involved almost 100% finance.

The growth rates of the past 5 years are not reflective of normal markets and the finance changes reflect a return to more conservative practices.

Buyers need to reconsider strategies and the "parlay" approach where you could go all in has slowed / ended. Lenders dont want customers that have three IPs or more which are highly geared and those customer may yet find that they dont have enough equity if markets correct. I have spoken to three people in the past month about something I havent seen in a long time. Negative equity after selling a IP.

They seek to sell a property and find their sale price wont cover what the bank wants on their own home. They drew $XX on their home and also 80% on the IP. Prices fall by 10% and now there is a shortfall of equity on BOTH properties. The bank wants $XX repaid on the PPOR as well as payout of the IP but the IP wont cover it. They owe the bank and some CGT and the bank still wants more to bring the LVR back and its not optional. In 2 of the three cases they need to sell two IPs as its the only way. ...So more CGT and thats just to appease the bank.

At present the best value person is a broker who is really good.

 

The "accumulation phase" is an early phase of a successful strategy, so why not just copy it?

Your point will always be true; market conditions dictate the next move. The adage "you make money when you buy, not when you sell" comes to mind. Buying property at the wrong time is an easy trap to fall into, when the aim should be to make short-term capital growth in order to add value and release equity for the next purchase. (Except of course if you can profitably add value to the property.)

 

The game is constantly changing. General principles remain the same though - buy income producing assets that grow in value. You just have to tinker around the edges to fine tune things to get further quicker.

 

I can't speak for all investors but I am currently applying for a loan, P+I, 4.19%.

A few years ago I was all about the I/O. Times have changed and investors need to move with the times.

 

Suggest you read some of Redom's previous posts (especially in response to euro's posts) explaining why chasing yield at expense of growth on the surface appears to be the answer but is actually steering you in the wrong direction when you look deeper.

 

The big issue that used to drive low yield acquisitions was growth expectations.

eg Yield 4%, Interest on loan at 5.5% and outgoings meant it was cashflow negative. Tolerance for cashflow loss tempered by a tax benefit. BUT the end game is always growth. At 12% compounded over 5 years thats a 76% capital return after 5 years. The growth also gives paper equity and 80% of it could be drawn as an equity release.

Now re calc at 1%. Or 0% or a loss....It doesnt just kill the purchase it stops the equity release too.

The viability is still there. Harder to find.

 

What's the advatange of going with the one lender for multiple loans?

Does anyone know if you get much of a discount on your rate if your loans are bigger? e.g 2M instead of 1M

 

I think everything has changed recently, but then again, nothing has.....carry on.....just use the grey matter

 

I'm only interested in the maths. As the game stands now, and is likely to stand moving forward... I don't see any real value in having equity for the sake of equity if you aren't able to harvest it. Others are completely free to disagree, but equity doesnt pay the bills or get you into a large number of properties or allow you to quit your job.

If I were to use the sharemarket to make a comparison - pursuing growth at the exclusion of debt reduction is the same as stock picking. It is entirely speculative, and while it has been remarkably effective for resi property investors during the credit boom, to continue employing it just as debt to income ratios are deliberately being curtailed ( and quite severely) means that you are choosing to disregard the role credit played in growth cycles of the past 3 decades. My view on that ( which no one is obliged to share) is that such views are foolish in the extreme.

I have chosen a dividend reinvestment plan. It is entirely non speculative. It facilitates debt reduction , which facilitates borrowing power and equity, but the key difference is that it creates equity which can actually be harvested. Debt reduction didnt use to matter because debt was assessed at "actuals" and I/O terms were available for as many years as you wanted, to allow investors to hold long enough to reach CF+ . But it matters now. It matters a great deal now. A very great deal. A dividend reinvestment plan means that even if you dont kick a growth goal at every step, it provides a pathway to financial independence. I believe this approach gives due regard to the role of credit... but others are absolutely free to not feel the same. It also has the very handy secondary value of providing a strong hedge/ redundancy against rate shock, P&I shock, loss of job, etc... in very simple terms , you dont go broke when more money is coming in than is going out. It buys you time.

I believe every younger or newer investor here needs to really think about credit. What is Plan B when you run out of borrowing power early on (and most of you will) , revert to P&I after 5 years ( and most of you will) more often than not cant refinance or extend I/O terms (damned servicing calcs) and find yourself potentially struggling just to hold on to what you have, let alone purchase additional properties...? What value does equity ( if you get it) provide then?

I would also remind younger and newer investors here , who may be reading great tales of success and bravado from others, that no pre APRA investor ever had to face these questions. Not ever. All of their successes, which you are hoping to duplicate - came in an expansionary credit environment. But the vast majority of post APRA investors will face these questions quite early on in their investment journey. And I think that's a big difference. I think its a disruptor to old methodologies. Now as I have said already, no one needs to agree... but Id be giving that a good hard think before dismissing the role of credit and the value of debt reduction.

 

How does paying down debt = equity that can be harvested? Not being a smart arse, would really like to understand this.

And when you say dividend reinvestment, are you talking about dividends from stocks or excess cashflow from NRAs props?

 

Extra repayments > redraw or offset

 

Or new borrowings.
Paying down debt increases borrowing cap because the new loan has a longer term than the one paid down.