How are multi prop owners doing in new IO rates?

A question to some of our friends here who have a strategy of pulling equity quickly after purchasing a house and repeating it with 5-10 props. Just interested to know how the increased IO rates affect such a strategy. Thanks.

 

It's not so much rates as the tightening of servicing that is ending the success of this strategy for multiple purchases. Most people wil be very lucky to get to 5 with this strategy now.

 

More important question will be in a few years time if banks don't renew IO and revert to P&I

 

I think most people will be okay. It will cause some pain but there are some things people can do to mitigate the problem. Keep in mind that when these loans do revert to P&I the rates will also drop by at least 0.5%. It won't solve the problem but it's does make for a softer landing.

The main reason people choose I/O ultimately comes down to cash flow. In theory people should be doing things with that surplus cash flow such as paying down non-deductible debt, saving it in an offset account or investing elsewhere. Doing this will create financial options for them which can be used to solve the problem in multiple ways.

Of course, most people don't do things with the savings, so it's going to cause some pain to some people.

 

These people need to be on decent incomes and have a fair bit of equity/cash to play with. They also need to work with a decent finance person that can maximise their serviceability across multiple lenders.

Building a portfolio of 5+ properties in the current lending climate ain't easy.

Cheers

Jamie

 

The interest rate rises are seeing IO investor variable rates at 4.75-5.25% currently. For those calling it the end of the world - I caution everyone to remember we're coming off extremely low historical rates. If your investment strategy doesn't work at 5%+ rates, it's not going to work in general considering property investment is a long term strategy and general interest rate cycles will see rates fluctuate well above current rates.

Keep a buffer in place, use fixed rates to mitigate potential cash flow risks and factor in that you will need to have P&I interest rates one day. Buying large portfolios on interest only and not reducing non deductible debt with their excess cash flow are just using the hope and prey strategy - which is nothing but speculation.

 

Tell me about! I cant get past a portfolio of 4 including my PPOR.

 

Hi Jess,
Is buying cashflow positive property the solution?

 

I am really starting to believe that Cashflow is King in this post APRA environment....more so than equity. Especially for investors wanting 5+ properties.

 

Christian yes it might help but only to a certain extent.

Firstly, lenders will only take a percentage of the gross rent when working out servicing but will sensitize the entire loan so a gross rental income of $1000 / month becomes between $700 - $800 yet 100% of the loan is calculated on a P & I basis at 7.25% +.

Then even if the Gross yield was 8% many lenders cap the percentage they will take so you may end up with 80% of 6% rather than 100% of 8%.

The list goes on and on but hopefully you get the drift.

 

Yes - cashflow through PAYG, business, shares and property.

Without good cashflow you'll be very limited as to how much you can buy.

with property, just buying a high cashflow property won't help much as the income gets shaded to 80% - it's also about debt reduction as well.

 

Cash flow helps, but the benefit is limited. I've found that the difference between a 4% rental yield and a 5% rental yield in serviceability calculations doesn't translate to much more borrowing capacity. It does make it a bit easier to hold, but it's not going to make much difference to the next property purchase.

A property that is in consistently high demand may have a lower rental yield, but the demand that drives the value up also tends to drive the increase in rental income. Whilst these types of properties are (more) negatively geared, they often become neutral and then positive cash flow faster, then continue to deliver more cash flow beyond that.

Having fewer properties and a deep reservoir of equity also may mean you can implement an exit strategy of paying down debt by selling one property a lot sooner as well.

Good cash flow is important but I believe that growth of both equity and cash flow is far more powerful in the long run.

 

Earn more. Save more. Enjoy the journey.

 

For me personally not much, perhaps because of very low LVRs, as I am not a very high risk taker, quite the opposite!
It really depends on each individual situation, what you will do with it, what will be the cashflow and the exit strategy planned!
All equity pulled out for reinvestment (with buffer of course for unforseen or tougher times), some for renovations which have increased equity and cashflow.
I have very low LVRs (PPOR was 100% paid off, and living in SYD PPOR had actually increased further 50% since pulling that equity out - 2 years ago).
Some has been lent to our SMSF, hence will be paid off within 10 years (some has been fixed for IO period of 3 years - until we need to start to repay SMSF loans), some via trusts, some to adult children (who help with cashflow and tax).
By my calculation within 8-10 years all of it will be paid out (even sooner), yet as you say a number of IPs have been added, so the increase in asset base is great!
Strategies we can employ for tougher times:
- Continue to derive income from our business (never to stop working - have been self-employed since 1998), or close and pull out 'Good Will'
- Draw dividends from private IPOs or sell (very risky - sophisticated investor type)
- Fix some I/O loans
- Grow offset accounts
- Access to SMSF within 3-9 years (spouse could access now with TTR)
- Use cash buffer (around 5% of asset base)
- Minor renovations to existing older IPs to increase rents
- Rent increases throughout the entire portfolio in various states (various states diversify and help)
- Redevelop a block into more IPs hence more cashflow and equity
- Don't accumulate as many
- Sell one or two (a nice choice to have!)
- Last resort sell our PPOR with the additional 50% increase in equity (but honestly I doubt we would ever need to do that!).
Perhaps with our ages and where we are in our accumulation journey this suits our situation...so we don't plan to pull out anymore equity as such (although my broker told me we were lucky we pulled out when we did what we did (from PPOR and few IPs) as now it is much harder - so we just buy the time via the options above!).
Perhaps what I am trying to illustrate is that nothing is constant, expect changes, buy time to duplicate (it is not you buy one IP each year - rather when funds and time permits) but be prepared and have plan B, plan C, and so on.
Like in Monopoly game, you leave some cash as a buffer, you don't just buy up with all your funds everywhere you land, you need to stick to a strategy, acquire when you can afford, upgrade to a hotel when permitting, sell or negotiate with other players when you can.... It is really as simple as that, BUT NOT EASY (I don't mean to play on words)!

 

What is the generally accepted "good" household income?

$150k?

$250k?

 

Isn't life a game of monopoly?

Where where was Park Lane again?

 

Both are good income figures ...you do mean per week ?

 

There have been some other threads on this, and the answer seems to be "kinda but not really".

Initially, this is the thinking
1. Serviceability tightening meaning you need higher cash flow
2. Higher yields mean more cash flow
3. Problem solved

Looks correct and hard to fault, but that is because it is leaving out some important info.
1. The higher yield will only really give you around $40-80 a week after tax
2. They only take 80% of rent in their calculation

It doesn't really do much for serviceability at all.
Also the really high cash flow properties generally are much lower in growth so you really need to decide if this is even worth it. If you can only borrow a much more limited amount, then you probably want to go for the higher growth properties that you can fit into your handful of properties.

There are a bunch of threads on this, with solutions like
1. Most common advice is to start active investing (renovating and/or development)
2. Find another way to increase your income (business, second job, rent your spare room, any other creative ideas)
3. Saving more of your income to pay down more non deductible debt. Have an overseas holiday every 3 years instead of every year. Sell your car/s if you live near a train station, etc... and put the money towards your PPOR debt.

 

Active investing such as renovating and/or development sounds good.....on surface.
What if young investor just start up in accumulation phase and and don't have enough capital to develop? Even with renovation and revaluation, due to serviceability tightening, bank could easily say no with pulling out equity, end up with money spent on renovation got trapped

 

I'm more Old Kent Road than Park Lane or Mayfair unfortunately