How to get There from Here

Discussion in 'What to buy' started by CountryNSW, 18th May, 2016.

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  1. CountryNSW

    CountryNSW Member

    19th Jul, 2015
    Hello All,
    There's been a few threads on this lately so I thought I'd throw mine into the ring too.

    There is to buy a local business (or two) in the next 10 years or so (when it become available - timing unknown), which would cost about $500k (each), for which we might borrow on a business loan up to $200k, providing we could demonstrate other serviceability; ideally we'd like to buy two such local businesses but we are not sure how to come up with purchasing power of about $1m, and these values are current values, so subject to usual increases. We would strongly wish to retain our present capital base as it also forms our own "future fund".

    Here looks like this: We own our own home, we own/run a small business which nets about $20k pa but going up slowly, we're a family with three school age kids, one of us has a part time job also plus investments, brings total income to about $50-$70k pa, which is completely comfortable, but not much spare. Investments are total about $500k, of which $120k bought a small IP in 2015 (net rent return about 5%) and the rest is in shares, managed funds and term deposits.

    So, options are to keep investing in shares/funds, but that is unlikely to create the increases needed to buy one or two businesses.

    Or, take some cash out of funds/shares and use for deposit on one or two IPs which are cash flow positive and have prospects for CG or reno to increase value, if the latter then we would need to buy them reasonably locally so as to be able to work on them to create the increase in value. I could see us buying 1 more IP but 2? Would 2 even be enough to get There? Isn't it hard to find CF+ plus CG all in one house? Are other types of IP better (apartment? commercial?).

    Or, release equity from IP1 to buy IP2, is this possible? Can one get a mortgage on a house one already owns? I probably couldn't ask for much out of IP1, it has some location issues that the banks won't like that much. But enough to use as deposit on IP2 - as Terry says never use cash for investing? Could one then sell IP1, then get into IP3, basically leap frog to build capital (but buying and selling expenses might eat up gains?)
    In reading PC, I note that a lot of structuring is based on tax benefits, which don't really apply to us, as we are in a low (very low) tax bracket. So a loss is an outright loss to us, the only advantage I see of property is the leverage and the potential to create higher returns than other investments through renovating (which is in our skill set) or developing (which is not currently in our skill set).

    Last point, given the uncertain timing of when things come up for sale, we need to keep our ability to buy in at any time and not compromise our capacity to buy the business by having too many other mortgages, given our income is never going to contribute much to serviceability. And we think better to retain existing capital than to risk for more and end up with less.
    Happy to hear your thoughts and comments, thanks.