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If goal ppor is higher value than portfolio you don't want prices to rise

Discussion in 'General Property Chat' started by Whitecat, 28th Jul, 2016.

  1. Whitecat

    Whitecat Well-Known Member

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    For example. If someone's goal is a $2M ppor and they have 3 IPs valued at $1.3M then how do they benefit from a rising market assuming the ips and ppor all have the same rate of cg?
    In fact in this type of scenario the goal ppor is probably going to have better CGs than the cheaper IPs as it's probably going to be closer/blue chip.

    This is a fairly common scenario these days as well. Investors start out. Buy a couple of cheap properties. Celebrate the market booming, but unless they want to live in something like one of (or a combined value of) those cheapies in the end then their dream property may just be slipping away.

    Of course if the IPs are in a different State that does relatively better than goal ppor state it might be ok. Or if you buy bmv IPs or add value e.g split etc.

    Asking because I realise this sort of scenario applies to me when looking at the properties that have the full page ads in the newspaper property insert.
     
  2. Leo2413

    Leo2413 Well-Known Member Premium Member

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    Simple answer is the more expensive you want your ppor to be the more equity you will have to create and in bigger chunks in order to fund the eventual purchase. Over time you could sell down quite a few well performing IPs to fund an expensive ppor but then a large chunk of your portfolio is gone. That's why value adding is so important for those who want the big stuff eg good passive income plus expensive ppor plus all the extras.

    The higher quality lifestyle you want, the more equity you need to create and in larger quantities than the normal buy and hold and also in a faster time frame.

    just my opinion.
     
  3. Tonibell

    Tonibell Well-Known Member

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    Agree that you do not want prices to rise on assets you will need to buy in the future. But at least being in the market will cushion the impact a bit.
     
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  4. Gockie

    Gockie I'm an ISTP-A female, so I might be a bit quirky! Premium Member

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    Absolutely. Or do as I did and buy a new PPOR nearby... my old and new are only 1.1km apart. Same postcode, virtually same suburb. Both houses, but in different price points. First one was entry level. And in the end when it came time to swap over, the price gap was not that crazy wide...
     
  5. Whitecat

    Whitecat Well-Known Member

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    I agree. Can't be passive. Have to be getting equity at a greater rate than normal market rise
     
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  6. Whitecat

    Whitecat Well-Known Member

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    Hi Gockie
    I'm not sure I understand how this strategy solves the issue. I've been trying to work it out. Wouldn't this strategy require quite a lot of income? Ie 'buy an entry level house in a good suburb (which is still going to not be cheap). Suburb goes up. Now better house in that suburb has gone up by more. Buy the better house.'
    How was this achieved through property investment?
     
  7. D.T.

    D.T. Adelaide Property Manager Business Member

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    Don't wait around for organic growth.
     
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  8. Gockie

    Gockie I'm an ISTP-A female, so I might be a bit quirky! Premium Member

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    We achieved the changeover because the partner had untouched borrowing capacity and we had nearly paid the old PPOR off. LVR at time of sale was 6.4%.

    PS. The LVR on the new PPOR is around 13%.... it sounds measly too. Happy days :)
     
    Last edited: 28th Jul, 2016
  9. Ace in the Hole

    Ace in the Hole Well-Known Member Premium Member

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    It's not always like that.
    When we bought our current PPOR almost 4 years ago now, it had dropped 1 1/2 mil on vendors original expectations.
    At the same time, we sold our more modest PPOR only one suburb away in a rising market as it was a median price point.
    I guess it's just where the demand is at that particular time of the market that drives prices.

    I've also considered our current PPOR as an investment too.
    Cost a fair bit to hold, but the CG in recent years has been great.
     
    Last edited: 28th Jul, 2016
  10. drg86

    drg86 Well-Known Member

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    I've thought about this too.

    If you have the time I believe buying the location of your goal PPOR should be part of your IP portfolio. Example buy the old beach shack and land bank for 15 years until you can knock down and rebuild. It's an IP for those 15 years so has some return (could pay itself off) and in most cases you would be well ahead in price compared to buying in 15 years time.

    I agree with your scenario, it seems to be difficult to buy a goal PPOR with greater value than your portfolio, I do believe it is possible however.
     
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  11. Big Will

    Big Will Well-Known Member

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    @Whitecat If you can afford to buy the dream PPOR it is better to do it sooner rather than later I agree unless it isn't in a area that has strong demands consistently (e.g. a regional). However it doesn't always get out of reach there are ways of doing it.. For example using your example and the assumption that all the properties double in 10 years.

    2016:
    IP - 3x430k (1.29M) - 80% LVR debt (~1M) which you pay IO and are CF neutral
    PPOR - 2M

    2026
    IP - 3x860 (2.58M) - Debt ~1M - Equity 1.58M (1.264M available equity @ 80% LVR) portfolio is now CF+ (not going to work it out).
    PPOR - 4M required deposit is 800k (80%LVR)
    So there IS a potential you might be able to buy now but you would need to be able to service an additional 4M in loans (total 5M).

    Lets pretend you bought another 3 IPs at 860k (2.58M) - Deposit required is ~500k so total assets now 5M and total debt 2M and now portfolio is neutral again.

    2036
    IP - 3x1.72M (5.16M) - Debt ~ 1M - Equity 4.16M (3.3M available equity). Very CF positive
    PPOR - 8M - required deposit 1.6M
    If you did buy 3 in 2026 total assets are now worth 10M (6x1.72) and debt is 2M or 8M. Now you can sell all and have a VERY small PPOR mortgage or leverage your properties and buy the PPOR or buy more and buy the PPOR in 10 years time.


    So yes it seems to be getting out of reach however you have options, 1 sell some or more IPs, get equity out at the peak of one period and buy when the market is towards the bottom. For example lets say you took the equity out and had at offsets sitting there in 2026 (1.264M) and a couple years later the market went back 10% from the peak (I don't think this is being unreasonable). So the PPOR is worth now 3.6M so now you need a deposit of 720k instead of 800k and your mortgage repayments are calculated off 400k less.

    However you should/hopefully are accumulating more property (reinvesting) to bridge the gap between your current situation and the goal during this 20 year cycle.

    I have not calculated anything to do with serviceability or market drops (except when buying the PPOR).

    20% is less likely to happen according to Crash calls for the Australian property market – how valid are they?

    Extract;
    To see a property crash – say a 20% average fall or more – we probably need to see one or more of the following:

    • A recession – much higher unemployment could clearly cause debt servicing problems. At this stage a recession looks unlikely though.
    • A surge in interest rates – but the RBA is not stupid; it knows households are now more sensitive to higher rates.
    • Property oversupply – this is a risk but would require the current construction boom to continue for several years.
    If again you were able to draw equity BEFORE this type of crash you are going to do even better.

    Further if you diversify your asset mix you maybe able to out perform or have a more consistent moving portfolio rather then riding the same wave as the PPOR (if ips are all bought in the same town as PPOR).

    Please note this is just really basic calculations, I haven't included a lot of the costing needed, serviceability and history is not a reliable indication of the future. Seek your own advice as this is just my opinion.
     
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