Is it time to stop buying (for now)?

Currently, my wife and I have the following properties:

• 3 bedroom house Umina Beach NSW
• 1 bedroom house, 1 bedroom granny flat Woy Woy NSW
• 4 bedroom house Park Avenue (Rockhampton) QLD
• Duplex with a one bedroom and a two bedroom unit Park Avenue QLD
• 2 bedroom house Marsden (Logan) QLD
• 2x 3 bedroom semi in Elizabeth SA
• 2x 3 bedroom house in Elizabeth SA

We also have a three bedroom PPOR that's going to get converted into a five bedroom (I'll go into this later) and I'm in the process of buying two more semis in Elizabeth (one title).

So all up, that's one PPOR and 10 IPs (I count titles not tenancies).
Finance is getting harder to get and my wife and I are thinking of starting a family soon, so we'll go from two wage for two people to one wage for 3+ people. This is also the reason that I'm going to convert one of the double garages into two bedrooms.

So I'm thinking that maybe I shouldn't just keep buying, the time doesn't seem great for it either, given that many markets have had significant growth in the past two years and I'm not sure I want to buy even more in Elizabeth as I've got quite a few in the same market there already.

I was thinking that my next move might be to seriously look at developments. My Central Coast properties are on 700m2 and 800m2 blocks respectively and are zoned medium density.
Plus, there's a fibro house next to the Woy Woy one with an old sick guy living in it. While I obviously don't want him to have to move to a nursing home or even die, I wouldn't be all that surprised if the property became vacant in the next few years. This would mean that if I bought it, I'd have 1400m2 to play with for townhouses.

While I might not be able to get finance from banks once my wife no longer works, I could always get a loan off my parents at 8%. I know this is high, but would I be able to refinance one the build is complete?

What are your thoughts? Does it make sense? Have you made the transition and if so, did it work for you?

 

I'm in a similar position, less properties, but thinking kids soon so playing a bit more conservative.

We just used equity to accelerate our share portfolio instead. Gives us some diversification, dividends should exceed interest and capital growth would be cream. Figure in a couple of years the share portfolio should provide an income to improve serviceability.

 

Hey spludgey, what's your overall portfolio cost you to hold?

Have you done a budget if you go to one wage? Can you survive on it

I've got a smallish portfolio and over waiting for growth, so I like your way of thinking in regards to developing. Nothing wrong with 8% borrowings if it carries you forward, as long as it doesn't stretch your financial comfort zone with the 1 wage.
I'm looking at a development project now as I want to create some instant profit. As long as you can handle the budget and risk I'm all for your method.

 

Hard to comment further without going into personal numbers like LVR, and not necessarily income but cash flow position.

I would imagine that your cashflow would be fairly healthy on that portfolio looking at the locations.

I have asked myself the same question many times, sometimes I have waited 3 years between purchases, paid down some debt, let rents rise and continued on.

Cashflow definitely changes while having kids and with a decrease in income. Is your wife going on maturnaty leave or is she leaving the work force for quite a few years?

In terms of number of properties I would consider pausing for a while, re evaluating and then continue when you are ready.

From memory your overall strategy is LOR long term? If so eventually you might need more properties if they return about 4% net.

If the cashflow from the properties is really good then I would personally look at diversifying into new markets.

Rocky has had a rough last 5-6 years. Vacancies have come down slightly but so have rents, we have a few in Park Avenue.

And no more Elizabeth buys.

Oh, and don't borrow money from family at 8%

 

Good questions, thanks for asking, my responses are below in blue.

 

Perfect, your in an awesome scenario. you have a couple choices.
Either keep paying down the loans to increase your cashflow scenario which might be a great idea for now, or see how much you can borrow to develop. The more cashflow you have the easier the decision will be.

 

You should keep buying to make sure you qualify for all future meet ups ;-)

On a serious note, if Labour is elected, you may want to get some more, but developing could also keep you busy too. Good position to be in.

 

Now what would be the first step to get approval? Do I get a town planner to see what they think that I can get onto the site? The Woy Woy property has a big eucalypt in the corner of the block, so that might affect things.

 

I hate to break it to you but your gadget budget has been moved into the mothers group coffee budget brokers probably factor that in

Check council website for DA's in the area and hopefully you can copy/paste!

 

In your shoes (but with my goals/risk profile), step one would be top up to 80% across the board and park surplus funds in offsets. Bigger buffer, more options.

As for the development, yep, speak to a town planner to get a bit of an idea of what’s possible.

There’s an element of risk developing with money from parents with the view to refinance to a lender when the wife is back at work - the lending landscape is a moving one. When you have a better idea of the project numbers, run them by your broker to see if it would be possible based on today’s policy as a starting point.

Food for thought - some other options you may or may not have considered:

• Get DA approval and offload the central coast sites, retain profit for use when wife is back at work OR hold the sites but develop when wife is back at work
• Buy some more CF+ stuff, don't pursue the developments (yet)
• Buy some stuff you can renovate to create substantial cashflow (e.g. a few of my clients have been buying 3 bed houses, turning them into 6-8 bedroom monstrosities returning 8%+)
• Sit still, await wife's return to work, go from there

 

Don't know much about the Woy Woy market but the house next door sound like an opportunity you should be getting yourself organized for. Make sure you know what can be done with a 1400m2 block as compared to a 700m2 one - it might be a great opportunity for you to creat some value (no need to actually develop it).

Also how is your portfolio performing ? It is an eclectic mix of properties - I take it you that cash flow has been a big driver in your purchases.

 

DA approval and sell off as Mr Ryan mentions would be a great idea and saves a lot of time and headaches. If you do choose to build, your gonna go for a 15-20% profit. Not everyone achieves this, especially those that aren't in the line of work. And this process will take you a couple years to complete and sell.

How's your lvr over the portfolio?

Say you take a break and just smash off 100k into your offset account, that should generate roughly anther 5k cashflow into your pocket every single year which will compound as you recycle that back. It will also increase your future serviceability.

 

Looks like I've hit a little bit of a snag in a well hidden clause.
To me it doesn't make sense to have multiple FSRs! It looks like I'd only be allowed 0.5:1 and 0.6:1 as excavations would probably be too expensive (right?).


Now, if I was to use Affordable Housing for 50% of both developments, would this be applicable to this clause or not? If so, this would mean that increases the FSR to 1:1 and 1.1:1 respectively, right?

Great idea, thanks! That's what I've been looking at this afternoon after work!

I think I might need to ask an admin to move this to the development forum now!

 

My interpretation of this would be (but I am not in the planning field, so this is just me reading it as a layman)

1. Have a basement, FSR = 0.6:1 (flat) or 0.7:1 Multi Dwelling house (does that mean townhouse?)
2. No basement, FSR = 0.5:1 (flat) or 0.6:1 Multi Dwelling house (does that mean townhouse?)

Affordable housing (50% affordable house, so getting the whole 0.5 bonus)
It would depend on whether you had a basement or not i guess

1. Have a basement, FSR = 1.1:1 (flat) or 1.2:1 Multi Dwelling house (does that mean townhouse?)
2. No basement, FSR = 1:1 (flat) or 1.1:1 Multi Dwelling house (does that mean townhouse?)

Given that I would be building terrace style townhouses. With the extra FSR, you might squeeze in an extra townhouse which would offset (or hopefully exceed) the cost of the basement.

 

Perhaps I should have asked this earlier, I just assumed.

Your 70-75% leveraged at the moment and you have your ppor debt?
What's your goal?
Are you trying to grow as much equity as possible then sell in 10-20 years and pay off debt?
Live off the rents?
With current debt what will happen if interest rates go back up to 7+%?

If you decide to develop then keep them, you have more equity but still need to make repayments when rates rise. If you go down to one wage won't that make it hard regardless of cashflow positive at the moment?

 

Thanks mate, that's how I read it as well.
And also thanks for putting me onto the affordable housing in the first place!

 

Plenty of helpful comments above which I won't repeat. I have only one thought to add on property, and one on personal life.

1 - You could offer to the old guy to either option his site or buy it with a life long rent guarantee. That way he gets some cash, never has to move until hes ready, you control the site when he moves on. Might not work but can't hurt to explore. Controlling great sites if great and even if you can't afford to develop for a few yrs whilst making babies, your time will come. Fast forward 10 yrs and having a starting site that you bought "in the last cycle" will make your numbers so much better.

2 - Kids are awesome, and the point of having the money in my view. If you and your partner are keen then dive into it and love them to bits, don't worry about the cash. Its always a cashflow hit having them but that ain't why you do it of course. Most people rush into kids with nothing, no assets, no equity, property investors do the opposite. We wait, sometimes too long.

 

Dont forget that even though RBA rates may go down with inflation, bank interest rates can do the opposite..

 

@spludgey Congrats on the great portfolio! We are currently in a similar position with planning a family, but only 3x IP's at present. Will try to get one more before the bundle comes along if we can.
Do you mind telling us how long it has taken to grow this?

 

It is definitely an idea. I went to speak to him once and he was very dismissive of ever selling, but if I add the rental guarantee, that might change things.
I guess the only downside is that we're at pretty much the very top of the cycle.

Good point. I think that having children will just be a little bit easier if you don't have to worry about money that much.

Yes, but it's not in their best interest. You can either butcher a cow once or milk it continuously.

Thanks.
I had to think about it for a little bit (I'm very forgetful). It's only been five and a half years! So I'm averaging two properties per year if you include my PPOR. It does feel like it was much longer ago though. It has been a great (and at times extremely frustrating) journey!