Investing off a low income

Discussion in 'Investment Strategy' started by JZ93, 29th Jan, 2016.

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  1. joel

    joel Well-Known Member

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    Unfortunately high yields are often in lower socioeconomic areas, where tenants don't always pay their rent! Then you can find yourself with no CF and no CG ;)
     
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  2. Property Twins

    Property Twins Mortgage Brokers & Buyers Agents Business Member

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    Never been the case so far. Touchwood
     
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  3. joel

    joel Well-Known Member

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    I'm experiencing it right now! My first tenants ever! Also dont forget cash flow will evaporate when rates go up..
     
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  4. Property Twins

    Property Twins Mortgage Brokers & Buyers Agents Business Member

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    That's unfortunate. We have had amazing property managers in Sydney and only minor issues. How were the tenant references and feedback when taking them on?
     
  5. D.T.

    D.T. Specialist Property Manager Business Member

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    I used to feel this way and perhaps it worked in the past when property had better yields and / or lending was easier to come by. But now it has created a problem:

    Y0: Lets say you're on $60k and so you can save $10k a year. You save for 2 years to get a 10% deposit on $200k
    Y2: You buy a property with $25 a week in net positive cashflow. You can now save $11k a year. You still need to save for 2 years to get the next deposit.
    Y4: You buy another property also with $25 a week in net positive cashflow and your first one as crept up to $40 per week now. You can now save $14k a year, so still need another 2 yrs to save for a deposit.
    An aircond replacement or hot water system repair and you're jeopardising your gains.

    Better method in my opinion seems to be in 2 phases:
    First
    Phase - Get capital growth properties. If you can't afford "Capital Growth Areas" (which may or may not be the same places as above, for all we know) then you have to derive it yourself via renovation etc. If you do an equity pull thats deposit #2, repeat and thats deposit #3 and so forth.

    Second Phase - Once you've reached a level you're comfortable with, then roll the equity from the above into high yield stuff. Whether that be overseas property, Australian commercial property, dividend paying shares, unit blocks etc, depending on your own interests and appetites.

    We're in the process right now of selling off a couple of non performing properties to get some more from the first phase. Due to the level of our goals, phase 2 is still a couple of years away.
     
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  6. Johnny Cashflow

    Johnny Cashflow Well-Known Member

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    Bull crap! You're all about high yield cashflow blah blah blah :p
     
  7. skater

    skater Well-Known Member

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    Most of my portfolio is in lower socio areas, and I can tell you now, it's mainly about both PM and tenant selection, as well as presenting a neat and tidy, clean property in the first place.

    We've been doing this a LONG time now, and sure, you get a few that are problematic, but the majority are stable, long term tenants.
     
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  8. D.T.

    D.T. Specialist Property Manager Business Member

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    Agree with this - I have a few myself in those areas plus those my agency manages. There is generally zero trouble. There's the occasional 1 that makes up for the rest though :p
     
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  9. trinity168

    trinity168 Well-Known Member

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    Begin with the end in mind. How much passive income do you want to achieve? A simple calc/guidline is

    E.g. 100K passive income pa
    You will need 2million worth of assets earning 5%.

    Good luck, Immerse yourself in this forum, there are so many mentors here that you can learn from. You are on the right track.
     
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  10. Big Will

    Big Will Well-Known Member

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    Just to clarify that is correct but if you want to live off the $100,000 then you will need $2,000,000 cleared (no loans) assets earning 5% p.a. and that is in today's dollars.

    If you have a 2M 90LVR and at 5% rental yield and 5% interest rate you would only have about $10,000 income (better keep working).

    If you have a 50 LVR you will need to have $4M worth of assets at 5% yield and interest rate, then you have made your $100,000 passive income.
     
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  11. trinity168

    trinity168 Well-Known Member

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    Yes, as per above example, 2 million all yours, not on loan.

    [Just a simple guideline to start with, not wanting to complicate it with inflation, LVR etc ... ]
     
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  12. 2FAST4U

    2FAST4U Well-Known Member

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    Cash flow is important, but I’d be willing to sacrifice cash flow for a lower yield if the suburb with the lower yield has more capital growth potential. I wouldn’t negative gear on a low income because it would decrease your servicing too much. However, I would be looking for a property that is cash flow neutral to slightly positive. As D.T said it’s much easier using equity and OPM money to fund your next purchase instead of being stuck in a high yielding cash flow suburb, which is experiencing next to no capital growth.

    Either way best you can do for now is live frugal, keep saving, and keep a close eye on your current property and hope for some capital gains to fund your next purchase. People talk about getting a 2nd job, but I’d rather use my time to upskill/increase my earning capacity. It’s much easier having a better day job than it is working a 2nd job and sacrificing quality time for 20 bucks an hour, of which you get taxed at a higher rate anyway.
     
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  13. New Town

    New Town Well-Known Member

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    I like DT's two stage approach.

    For cap growth - a general idea might be to stretch and buy cheapish (unrenovated) 3 bedroom PPR in a great area. Then move a couple of people into the other rooms. It will put heaps of cash in the wallet.

    Does have income tax and CGT implications

    (though not likely much cap gains in Melb or Syd for a while??)
     
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  14. Jayy

    Jayy Active Member

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    Hey JZ93! I'm in the exact same boat as you, same age and income. I have two properties in Logan/Woodridge. It is definitely possible with our income. I've been pre approved for my next loan so looking to purchase my 3rd soon. It's great to see someone my age investing as well instead of blowing all their money on the weekend. Feel free to PM if you ever want to have a chat about invest.
     
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  15. Blacky

    Blacky Well-Known Member

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    Im with @D.T. You need a phased approach in order to meet your goals.

    Also dont be scared to have multiple or multi-disiplanary goals. While investing while on low income is admirable and encouraged - investing on high income is far easier.

    Develop a plan/strategy to increase your income. This may include;
    1) developing yourself to enable a promotion/pay rise (training/further edumacation)
    2) taking on additional work and/or a second/third job
    3) investing for cashflow
    4) developing multiple income streams or 'side' business which you can operate in your spare time.

    Dont be scared to make bold moves in order to increase your income. At the right time even a threat to leave a role for an increase, will yield offers of a payrise to stay.
    If you are looking at further developing yourself with education - speak to your employer, as often they are willing to assist. I was able to get my employer to pay for my masters degree, while also claiming it as a tax expense. They also provided me with time off so I could complete the study - so basically it didnt cost me anything in terms of $$ or time, it just too a bit of effort.

    Personally I think that this is one aspect of the investment journey which is often overlooked when considering long term strategies. For me personally I have been able to consistantly double my income every 3-4years by making it a focus area.

    Blacky
     
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  16. JZ93

    JZ93 Well-Known Member

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    Impressive that you have continually increased your income like that! Well done
    Yeah couldn't agree more, I've used all my threats up I think haha Definitely doing the most I can with what I've got for now...