Help in starting my IP portfolio

hi everyone!

Basically my fiancé and I wanted to use the equity in our Sydney apartment to buy our next PPOR (intending to rent it out for a few years). After seeing properties we like go stupidly over actual value as all the FOMO's froth at the mouth over each other, we have decided now is not the best time to be buying in Sydney. Is this a correct assumption?

So instead I suggested that we look at using our now unlocked equity (280k) to purchase 1-3 IP's in Brisbane with the intention of purchasing our next PPOR in Sydney in 5 or so years time when the market has stagnated. If it ever stagnates.

The other option we have is to buy the next place and sell our apartment. But that's a lot of stamp duty waste and we only bought our apartment in late 2013. And we would still have a very large non deductible mortgage.

I'm looking to purchase 2 around the 350-400k mark and 1 maybe around the 500-600k mark if I can get into an area with more potential for CG. To minimise risk I would prefer a yield of 6+% and also to minimise the impact on our cash flow. I would accept a lower yield on the more expensive property if it meant getting into a better CG area.

My questions are:

Is this a sound strategy? Are there any suggestions people more experienced can offer?

Should I use 80% or 90% loans?

And what areas of Brisbane would people suggest I look with this strategy in mind? I have been looking closely at the Logan area (mainly due yields, just concerned about lack of CG) and also considering Redcliffe due to the train line being built..

Thanks in advance

 

Hi TFE,

Sounds as though you have a few options available to you. Your first step may be to decide what you want the most. ie a PPOR in Sydney, or are you happy to live in your Sydney apartment, invest in IP's in Brisbane and perhaps rent a larger house in Sydney in the future?

In time, your investments may provide the cashflow to help you purchase a PPOR in Sydney, or at the very least, support themselves so that you can inject your own funds into a Sydney PPOR.

Regards Jason.

 

Hi Jingo,

That is the decision we have been deliberating over for a while. We would love to have a proper house, but I don't feel we need it just yet. We would need to take on a very large mortgage, and when you plug in higher interest rates, the figures get very scary. At the moment, we could rent a similar property for much much less than the interest charges per month if we were to buy.

Hence why we decided to look at another way to manufacture wealth in the hope that further down the track we can purchase a place without the crippling mortgage.

 

@TFE, your plan sounds solid. 100% agree it's not the time to be buying in Sydney (unless you're a gambler).

With that amount of equity, providing you have serviceability, you'll be able to buy that breakdown of properties with change to spare at 88%.

Seeking a solid yield on the two smaller purchases is a good idea to keep holding costs down and serviceability up. Run your plans by your broker and ensure she/he believes you'll be able to make each purchase without hitting a wall.

That'd take you to well past $1mil of property which is a sizeable portfolio to produce you a deposit for a Sydney PPOR in half a decade, assuming minimal growth.

 

Thanks Steven, we already had pre approval in place for a place in Sydney for 1.5 mil, so we have the Servicability in place even with the tightening of the rules.

The Y-man: our household income is around the 280k mark gross, so as far as I believe we have a way to go before we hit our wall. With this income in mind, are there any strategies you would suggest?

Thanks for the replies!

 

In my opinion, yield is better at the lower end of the property values. Under $350k.

If buying multiple properties in one state, watch out for land tax limits.

You could each have one as indivuals or buy in trusts.

You could buy your first interstate without using a trust and then use a trust for future purchases.

I've just bought my first IP in QLD as an individual and will buy my next via a trust.

 

Thanks for the heads up wombat77. I'll look into setting up a trust for future purchases.

I read that trusts land tax limit is only 350k, so it would be better to purchase the more expensive place as an individual or just stick with sub 350k properties?

 

I understand Land Tax is on the unimproved land value component only, so that gives you some wriggle room on value.

 

Sound Strategy - start with the end goal in mind. Why are you doing property investing and what are you trying to achieve. Once you have this answered, the strategy will answer itself.

For example, if you are looking to generate passive income, then Logan could be a good spot.

If you are looking to accelerate equity, then perhaps renovation or speculate on potential capital growth.

80% or 90% - speak to a good broker on this. There are a few considerations here

- What's your limiting resource. Is it serviceability or equity. If you have alot of equity, then go 80% but if you are limited consider 88% + LMI.

- What's your strategy. If you are looking to renovate, stick to 80% as this will allow you to valuation shop, getting a few valuations from different banks. If it's buy and hold, and a rising market then leverage up and go to 88%

- What's your risk profile

Areas in Brisbane

Once again, comes back to goals. Once you have this nutted out it will answer itself.

Hope this helps,
Michael

 

Thanks Michael. I have an end goal in mind of 100k passive income after tax for retirement. So by my calculations that's around 10 properties. But to get to that point I will need a combination of CG and CF properties.

At the moment we aren't limited by serviceability or equity, we have about 280k in equity and about 280k a year combined income.

I was planning on going for 2 captial growth properties to start and then balancing it with one yield property. Then hopefully rinse and repeat.

For the first property I think I'll keep it simple and buy within 10-15 km of brisbane CBD, low maintence non renovator. Then from there look for more creative ways in future properties.

 

Working backwards.

$100,000 passive income

Let's assume very generic 5% return, so you will need $2,000,000 unencumbered debt at 5% return to generate $100,000 passive income.

Let's say 20% lend, you will need a portfolio worth $10,000,000.

If it's after tax, you will need more.

The good news is with $280,000 in equity you are well on the way there.

Good luck!

Cheers,
Michae

 

In theory yes.....works on a lot of assets.

But realistically on OZ property you need $3m unemcumbered.

Because assuming an average property (lets say 300-450k) it will probably get you around 5% gross. Net you are looking at about 3.5%. 3.5% of $3m is about 100k give or take. Obviously if the return is higher you will need less in assets. But as a rule of thumb this works quite well.

On stocks ...with good dividends around 5% average......the 5% calculation works well.

Also you will also need less with property if they are newer as depreciation works to reduce your tax liability. For example lets say you are getting $130k rent on six properties...expenses are say $5k per property. That leaves you with 100k net before tax. Lets say each property give you about 6k in deductions via depreciation. That means you have 36k reduction on taxes so you only pay tax on a gross of 64k...which is about 13k in tax....so you are left with 51k plus 36k which equals 87k.

That is more than if you paid tax on 100k income...which will leave you about 75k in the hand. If you split the income due to joint ownership you will only pay 5k taxes on depreciation scenario vs 20k on the other one.

Note that this is just a scenario...and you need to do your own due diligence.