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How to decide on strategy

Discussion in 'General Property Chat' started by timetoact, 5th Aug, 2015.

  1. timetoact

    timetoact Well-Known Member

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    How do you decide on what strategy is right for you?

    Ultimately the goal is to retire early with solid income, $150k/year minimum.

    I have read a lot about cash flow positive investing which makes a lot of sense, makes it easy to increase total asset pool due to good cash flow. Over time this cash flow only gets better as rents increase and debt stays the same.

    However buying lower yielding properties that experience higher capital growth increases the asset pool through growth rather than acquisition... But the holding costs are higher limiting further purchases.

    We have a large amount of cash to start investing with so equity is less of a problem than cash flow.

    Does anyone out there actually split their portfolios into both of the above? Maybe having several high cash flow properties and a few more aimed a capital growth? Or maybe buying cash flow positive properties on city fringes on large blocks for future capital gain through sub division?

    Appreciate any advice on how you nailed down what your strategy will be.
     
  2. Chilliblue

    Chilliblue Well-Known Member

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    I hold a mixture of both as well as other investments outside of property.

    It would be worth sitting down with a reputable financial planner (i.e. one that is licensed and does not want to sell you only their products) and review your current situation.

    From there you can map out where you want to be, by when and which methods/types of investment vehicles are required to get you there.

    Everyone is different and no one would be in your exact shoes so education and knowledge is the key.

    Best of luck.
     
    Last edited: 5th Aug, 2015
  3. Leo2413

    Leo2413 Well-Known Member Premium Member

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    You'll get a whole host of replies to follow. To answer your question about what strategy, in my opinion - it will depend on a couple of things.

    1. Your goals
    2. Time frame to achieve them
    3. Current financial situation, (cash/equity and servicibility)
    4. Level of risk your comfortable with (risk profile)
    5. skillset.

    You have stated that you want to retire on 150k a year, im assuming that's net. Roughly, you will need at least $4,000,000 unencumbered net worth, at a 5% return and your more or less at your goal.

    Your gonna need a hell of a lot of cash flow positive properties to get that. It also depends on your timeframe, you didn't say in how many years.

    Don't really know much about your situation, timeframes, risk tolerance ect but Its safe to say you are gonna need really good CG properties, and at times balanced by neutral or positive geared properties. But you want to keep your eye on the CG potential on every deal. 150k passive income is a hefty goal for most in my opinion, so your gonna need to start reading and educating yourself on the basics, net work with experienced investors on the forum and really think carefully about which strategies/approach is going to give you the best chance to achieve your goal which also suits the above 5 factors I listed. Some strategies I would emply are:

    1. Buying BMV, or really buying well through good negotiating
    2. Buying properties that have potential to add value to
    3 Buy properties in areas that are affordable but have great growth drivers which increases the chance of good-great medium term CG
    4. Maybe development one day.


    In my opinion you will need to do a lot of reading and learning the basics and more on property investing as well as taking lots of consistent action otherwise attaining 150knet passive income is going to be very elusive. This is just my 2 cents.
     
    Last edited: 5th Aug, 2015
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  4. timetoact

    timetoact Well-Known Member

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    Thanks Leo,

    Main goal is to retire in no more than 20 years - we are mid 30's.
    Secondary goal is to not sacrifice everything over the next 20 years in order to do so - maintain lifestyle.

    We have just sold PPOR and have ~$900k cash, plus a small folio of shares. Household income is medium-high.

    Risk profile is quite high, but we are planning on having kids in a couple of years so cash flow in the short term is important.

    When you speak of capital gain being the main focus over PCF, could you give me an idea of what this means for you?
    For example if I could pick up a dual occupancy house 20km from Brisbane on 800sqm that has positive cashflow now but will have the potential for sub division in the next 10 years would that satisfy the capital gain component?

    I don't want to buy in the sticks just to achieve PCF but I also don't want to get stuck with a bunch of NG'd properties with a single income and rising interest rates

    So I guess my strategy is leaning towards picking up a few quality PCF IPs sooner rather than later and then maybe once we are back to dual income we can get a bit more aggressive on CG, hopefully in time for Sydney's next boom...
     
  5. MTR

    MTR Well-Known Member Premium Member

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    I think what is critical is to keep learning and to be persistent, the more you know the chances are the better the outcome IMO.

    I started off as a passive investor and have moved onto being an active investor. Investing is now a business which provides income from developments and I also have cash flow positive properties and will flip properties for small gains if the opportunity arises. I am not at all emotional about properties whatsoever, only when I buy.. that is not a good trait:)

    I would recommend you step outside your comfort zone and start looking at strategies where you can generate cash flow and equity, slow and steady, look at numbers people have posted.
    I posted my Spearwood project, do a search on other investors, perhaps something clicks for you?

    All the best

    MTR:)
     
  6. Leo2413

    Leo2413 Well-Known Member Premium Member

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    Main goal is to retire in no more than 20 years - we are mid 30's.
    Secondary goal is to not sacrifice everything over the next 20 years in order to do so - maintain lifestyle. Your relatively young so that's a huge plus on your side.

    We have just sold PPOR and have ~$900k cash, plus a small folio of shares. Household income is medium-high. That's a lot of cash to invest with, are you planning to rent cheaply and invest it all? Or buy another ppor then invest the rest? You have a lot of options so another big plus.

    When you speak of capital gain being the main focus over PCF, could you give me an idea of what this means for you? In order to build wealth, you will need to build up a 'critical mass', whether that's 2mil or 5mil etc will depend on your own goals. You have said you want at least 150k passive income, so your critical mass (if only counting property and nothing else) would need to be roughly around $4million unencumbered assets returning a yield of say 5%. Its going to take many positive cash flow properties to return that over a very long period of time.

    But at the same time as you have rightly said you cant have all NG properties as its not sustainable (although doesn't mean to not have any either). So when I say to focus on CG over positive cash flow, I'm not meaning to not buy positive cash flow or neutral cash flow properties, what I'm saying is to make sure that the positive cash flow properties you buy are in areas that have good growth drivers (eg low supply anticipated high future demand, good population growth, still affordable, good infrastructure and more planned , good amenities, low vacancy rate etc etc) to increase your chance (never any guarantee) of medium to long term CG, while in the short term making it feasible for you to hold.




    For example if I could pick up a dual occupancy house 20km from Brisbane on 800sqm that has positive cashflow now but will have the potential for sub division in the next 10 years would that satisfy the capital gain component? To me that sounds not too bad at all for a medium to long term plan on this particular property.

    I don't want to buy in the sticks just to achieve PCF but I also don't want to get stuck with a bunch of NG'd properties with a single income and rising interest rates. Yes exactly. That's why youll most likely need a balanced approach. When you buy CF+ properties then be sure (as much as you can) that its in an area with a high chance of medium term CG. Even more so with NG properties because your 'losing' money each year. That's why if you can buy BMV and have room to add value to increase the rent it takes some of the sting out of the NGness in the short term, and also a good way to possibly manufacture equity.

    So I guess my strategy is leaning towards picking up a few quality PCF IPs sooner rather than later and then maybe once we are back to dual income we can get a bit more aggressive on CG, hopefully in time for Sydney's next boom...

    No one can tell you what to do. Only you know your situation best and once you have all the options you can make the best decision based on your current financial situation. But be sure to have the knowledge first. Just for eg sake, buying a 2bedroom new unit with 8k year strata in a building of hundreds of units would most likely be a disaster.

    Just my opinion. Good luck!
     
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  7. Leo2413

    Leo2413 Well-Known Member Premium Member

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    +1
     
  8. giswal22

    giswal22 Well-Known Member

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    Could you recommend a planner? A good one is hard to find! preferably in the Melbourne region
     
  9. sash

    sash Well-Known Member

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    Spot on Leo.....a lot of people will tell you the income they need to achieve their transition from paid retirement to whatever. The question as always is how are you going to get there.

    Just recently...I was a having conversation from someone from the forum on the exact topic. Wanting 150k in income is great but what if you only earn $50k now....technically you are replacing this with 3 times the income. Is this realistic...probably not for most people unless they can also bump up their salaries significantly or have a very high risk tolerance.

    But let use say there is single person on 50k....after tax they will have 42k in the hand. So for them to achieve a net income of 42k they probably do need about 45-50k gross income coming (difference is because properties has artificial deductions like depreciation but lets keep it simple).

    For example to get 50k in income using the 4% rule..you will need $1.25m net in property. Lets say you currently say this persons owns their PPOR outright and has 1 IP worth 350 with 50% LVR. Based on this they will probably need to purchase (rough rule of thumb)..another 4-5 properties worth 300-400k and allow about 1 cycle (10 years) of property growth. This should leave them with about $3-3.5m in property in this cycle assuming they bought in Perth, Sydney, Melbourne or Brisbane. That should should leave them with each property worth about 500-550k. Assuming they did very little debt pay down...they should be left with around the 1.7m to 2m in net assets which should return 70k to 80k in income. Assuming inflation is 3%....their purchasing power should have reduced by about 35% in that time. That that should return about 47k to 52k income in todays' dollars.

    Obviously...this is just an illustration....but it shows what can be done. To get to $150k in income..it is much harder. If you have equity about 500k...and say and income of $150k-200k plus you could do this in about 1.5-2 cycles....but you will need great skills and a high risk tolerance. You will also need about 20-22 300-400k properties....with current APRA rules this may not be realistic.

    For example the people who made money in Sydney started around 2006-2008 and bought consistently till about 2012-2013....and then in 2015...it all came home. That then that came home in growth for Sydney. Some people would have increased their networth by $2m plus...depending on where they bought...and number of properties they bought. But all this growth can also be undone quickly...particularly if they bought in places like Mt Druitt...where properties bought for 180-230k are now worth 45-520k. Lets say you bought 6 properties and each one has 250k in CG...you have created $1.5m in equity...but in a market correct that can quickly drop to $1.2m. Such is life.

     
    Last edited: 5th Aug, 2015
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  10. timetoact

    timetoact Well-Known Member

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  11. Chilliblue

    Chilliblue Well-Known Member

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  12. Leo2413

    Leo2413 Well-Known Member Premium Member

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    @sash Agree Sash. Great post and straight to the point.

    I have always said that the more lofty the goal, the more hardcore committed, knowledgeable and sophisticated an investor's approach will need to be, especially on shorter timeframes. just my opinion.
     
    Last edited: 5th Aug, 2015
  13. timetoact

    timetoact Well-Known Member

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    Thanks for your brutal honesty Sash,
    Yeah it's not meant to be easy, hence the question on strategy, lots more planning to be done... But I don't think it is unachievable given our current age and position. If we simply bought a PPOR for $1m and it doubled twice in 30 years we would be at $4m without any other investments and zero debt from year 2, so substantial free cash flow every year that would obviously be invested somewhere.

    Our current income is above $150k.
     
  14. Leo2413

    Leo2413 Well-Known Member Premium Member

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    I get what your saying but then at the end you still need somewhere to live, so you'll need to sell PPOR, buy much cheaper one, then reinvest the remainder cash for a net return, If you buy properties with the remaining cash you have all kinds of costs too so that wouldn't get you close to your 150k net in the end. And that's assuming your 1m ppor turns to 5mil, cos you still need 1mil at least left over to buy a place to live... but from what your saying I know your not counting on this plan which is just as well,imo.
     
  15. timetoact

    timetoact Well-Known Member

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    No I'm not counting on that plan.

    However don't forget the spare cash flow every year through having no mortgage or rent would add up to a tidy sum even if invested in a simple index fund. $50k per year for 20 years at 7% would add a cool $2m to the pot... Dammit now I've added another option to the list...
     
  16. acorn123

    acorn123 Well-Known Member

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    @timetoact:
    If you have an income of $150k, the priority might be to beat the taxman IMO; the property investment is just one of the tools.
     
  17. Be Developer

    Be Developer Property Developer Business Member

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    @timetoact

    Others have coverd mosT, so no need to repeat regarding what has been said about property.

    Understand power of multiples, look at other class of investment, shares,LIC,ETF, etc. Investing in private profitable business will get you closer to your goal.

    For example, Netflix went from $40 to $120 (given n take) in less then a year.. So worth look at other asset classes for investment.
     
  18. Ardi

    Ardi Well-Known Member

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    Could anyone recommend a top financial planner? I believe i could really benefit in using this service to help with stratergies to meet our goals.
    NSW would be good if possible.
     
  19. Leo2413

    Leo2413 Well-Known Member Premium Member

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    Do those goals include building wealth through a property portfolio?
     
  20. Ardi

    Ardi Well-Known Member

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    Sure do mate and would like to have a look into super to. Only 30 but got to get every penny working!