My investment journey – a reset and re-drawing of my plan at age 40

Discussion in 'Investment Strategy' started by Orion, 7th Mar, 2018.

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  1. Orion

    Orion Well-Known Member

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    Hello everyone.

    I was a long time Somersofter, although I’ve have been relatively quiet here on PropertyChat. I’ve been investing heavily in property since I was 23, and worked my way up to 7 IPs. I’ve been on TV and in print talking about my journey. Unfortunately, 6 years ago I made some big mistakes that have cost me dearly, and have been withdrawn and trying to work my way out of this mess for the last 5 years.

    What I did well:
    • Started investing early (23 or so)
    • Disciplined saver, continued to replicate
    • Educated myself (podcasts, audiobooks, books, many seminars, countless hours over 15+ years on forums)

    My ‘mistakes’ – please learn from these!

    • High gearing investing – e.g. a 95% LVR into very low yield ‘high growth’ property (that didn’t grow!)
    • Buying two properties in the same location, in high risk location (Gladstone) with poor market timing
    • Too aggressive in investing, LVRs usually around 80% the whole time
    • Went it alone for too long (no financial planner, didn’t ask for help from SS/PC enough)
    • Invested in geared share investment, lost the whole lot ($75k).
    • Land tax started to creep up and become quite expensive

    Results so far
    • I’ve had a mixed bag of results. 3x properties have done well, 2x went nowhere, and the 2x Gladstone ones have crashed 50% in value and rents by 65%.
    • Tried to sell one Gladstone property last year with no luck (the inferior of the two).

    Current situation
    • Cash flow still negative. Each Gladstone property is -$20k per year negative cashflow (total $40k) Losses trapped in discretionary trust, cannot be offset.
    • Sold two inner Melbourne properties to improve cashflow and free up some funds. Unsure if this was the right move, but it’s done now anyway.
    • Mentally and physically in poor shape. Have put on weight, lost my spark, my ‘mojo’. Have been withdrawn and unhappy. Fiancée recently left me.
    • Have been working with a good Financial Planning firm and a good Property Advisory firm (BA + research data).


    My current plan - focus is to reduce debt, improve cash flow, reduce stress

    Eating right and hitting the gym again to get back to my old happier, healthier self.
    Have been mediating (120 day streak). This has really helped and I recommend to everyone.

    In regards to IPs, I have 3x Victorian ones (outer SE Melb, ~$500k mark) and 2x in Gladstone.

    Step 1 (now) - Planning to sell the better of the two Gladstone properties. The market is still very weak, but my advisors tell me there is no real positive outlook in the medium term for Gladstone. Bought at $600k (2012), should sell for about $360k. I’ll end up with $20k per better cashflow, but a -$150k loan (and obviously lost time, purchase costs/stamp duty and so on) – however I think it’ll be good mentally to move on from these. I’ve been holding on for things to get better for years now and I just keep bleeding cashflow.

    I sold my expensive inner Melb IPs to buy a PPOR, but that’s on hold now with the fiancée leaving me. Currently moved into a rental and just got a housemate to share expenses.

    Step 2 (mid/late 2018) – Depending on the sale of Gladstone property 1, sell Gladstone property 2 (the weaker one). Bought for $530k (2012) , should sell for $270k. Cash flow improvement of $20k again, left with a -$200k loan.

    Step 3 (2019/2020) – Possibly sell the weaker of the outer SE Melb 3, to again reduce debt and improve cash flow. Property Advisory tells me this area (Melb outer SE) will have peaked around this time.

    This would leave me with 2x outer SE Melb IPs with a much better debt, cash and cash flow position (but a very tax inefficient portfolio with low levels of investment debt). Will still be renting for my PPOR. A long way from 7 IPs.


    Future plans – focus on building again for the future

    Option one - Australian Property, going for growth with moderate yield
    Step 1 (now) – Need to define my target state and plan in terms of LVR, asset types, cash flows. For properties this would be locations, may also include shares and other investments. Interested in US property to improve cash flow but am unsure if it’s the right move.

    Step 2 (2019 – 2029) – Start to re-build again, with much more conservative levels of debt, lower LVRs, better cash flows. Buying growth properties in a variety of capital cities in line with market cycles/timing and to minimise land tax. Negative gear to improve tax efficiency. Cash flow will be constrained at this time as I’ll be starting a family (hopefully!) and buying a PPOR in there somewhere, so perhaps during this time I might buy one PPOR and only 2x IPs.

    End game (2033 age 55) – have one PPOR (paid down as much as I can), 4x IPs, some other small investments and ideally low LVRs (50% ?) and good cash flows.


    Option two - US Property for income, use to re-build Australian growth IPs
    There is a part of me that wants to sell the whole lot and replace it with 4x US properties outright. This would give me a positive cash flow of $60k AUD pa (possibly tax free for about 3 years as I could offset against my huge trust losses from the Gladstone properties).

    I’d then live off (buy a PPOR and provide for my family) on my salary income and use my the US cash flow to rebuild an tax effective Australian growth portfolio, 1x IP (~$600k, 80% loan) every 3 years or so over the next 10 years.

    Lower stress levels and better cash flows throughout, US property performance depending. Should expect some growth on these as well, they can still be purchased at a 50% discount from previous peak.

    End game (2033 age 55) – have one PPOR (paid down as much as I can), 4x US IPs (option to sell down), 3x Australian IPs, some other small investments and ideally low LVRs (50% ?) and good cash flows.


    Option three - ??? Your suggestions ???


    I’ve made the mistake of not asking for help in the past. I’m learning from this and very much look forward to any comments you may have.

    Thank you.
     
    Last edited: 7th Mar, 2018
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  2. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Good summary and sounds like a good plan. I think selling the duds would make good financial sense as well as emotional sense.

    I am surprised you are still keen on properties after what has happened as most would have given up, but I guess you have learned a lot from your mistakes so you should do much better than before.

    Any consideration for share investing?
     
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  3. Propagate

    Propagate Well-Known Member

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    I have no suggestions, but wanted to say fair play to you for sharing your lows. A great help/warning to others and also no doubt cathartic for yourself.

    Glad to hear you are taking your health seriously, at the end of the day if you don't have that you have nothing anyway. No sense in being the richest guy in the cemetery.

    Absolute best of luck with your plans, looks like you have your head screwed on and goals to work toward.
     
  4. GoldCoastBound

    GoldCoastBound Well-Known Member

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    Don't be too concerned about taking a few steps back, because as long as you take the correct steps moving forward having learned from these mistakes, you'll be far better off for it..

    I know, because i lost way more than you and was older than you when worse happened to me..

    6 years later after starting with nothing, we built an online biz and i have huge cashflow and moving forward fast with property development..

    Just swallow the bitter pill now, keep up with your exercise and these bad times will just be part of your journey mate..

    I wish u all the best
     
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  5. The Y-man

    The Y-man Moderator Staff Member

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    @Orion

    The one thing you have gained lots of is experience and knowledge :)

    The Y-man
     
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  6. The Y-man

    The Y-man Moderator Staff Member

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    I'm really curious to know where/what these were. As you know that has been (and is) my strategy. PM me if you don't want it public.

    The Y-man
     
  7. The Y-man

    The Y-man Moderator Staff Member

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    Err, stuff that. Come and join the PChat dinner for some greasy, hi fat parma! :D

    The Y-man
     
  8. Orion

    Orion Well-Known Member

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    Thanks. Yes, this is something I'm hoping to get from the financial planner. I don't really know much about share investing, although I had for a long time thought the share market was overvalued (for the boring index fund approach I would probably go for). I understand there are many markets, international, emerging and so on.

    I like the idea of owning shares directly, rather than units in a trust. Unsure what types of investments these are, are these LIC's?

    I'd be interested learning more about high yielding CPT's and the like, I know I should focus on growth by I've just had almost a decade of bad cash flow (and it's associated stress) and which is why I'm leaning towards building a good cash flow first (even if it's just $20k a year) and then using this to invest down the growth path.
     
  9. The Y-man

    The Y-man Moderator Staff Member

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    There a time and place for everything.

    The Y-man
     
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  10. Jordan Sinclair

    Jordan Sinclair Well-Known Member

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    I prefer to invest in the US because of the cash flow. If you have any questions about getting started, I'm happy to help.
     
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  11. MTR

    MTR Well-Known Member

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    Thanks for sharing.
    Keep working it:)

    If investing in US, please ensure that you understand the difference between gross yields and net yields.
    Dependent on where and what you invest in you could be taking 40%+ off the gross yields.
    Its a volume game, if you can only afford one property then I probably would rethink this strategy as you have set up costs, accounting fees etc to consider.

    Finally whoever you source properties from and regardless of where, the same rules apply..... show me your track record, what have you achieved, what is your income and of course you want the addresses.
    Jump onto Zillow to verify the information

    MTR:)
     
  12. Gypsyblood

    Gypsyblood Well-Known Member

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    @Orion so brave of you to share this all. Anyone could have made those mistakes.. people get swept up in hypes all the time.. the test is how you are handling them and looks like you are reaching out and taking all the right steps so kudos to you and I hope you look back in another 5 years and find yourself in a better place then you hope to be in.

    7 IPs that are draining you vs 2 that build you and gives you less stress and ultimately better health.. we are not taking any of this to our graves so the impact of these investments on your overall journey is just as important as the end goal..

    In your situation I would take it a step at a time. While the loss of control earlier could be making you want to have an airtight plan now, I would literally not take on too much, have a high level view which is very flexible and open to change and first get a breather by selling the properties that are draining you. With that done I will buy one at a time and readjust my plans with each property I buy. So that open ended flexible take it a step at a time would be my strategy 3.

    But that’s just me and it might not be your natural style. So maybe for you, it’s much more motivating to have a clear path to execute. I feel like strategy two is more risky and you should only do that with a mentor.. strategy 1 feels safer and possibly what you need before you start taking risks.
     
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  13. sash

    sash Well-Known Member

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    As always...I am the Public Enemy and have a differnt opinion.

    I think Gladstone fortunes will turned. The houses there are below replacement value...if this is the case...they could increase quickly. So you could be less in debt.

    So the next question is have you worked out the CF of holding the 2 Gladstone properties? If so can you afford them? The model back if the two properties got back to say 500k...in another 3-4 years would the holding costs be worthwhile ...think htrough this carefully taking a 500k bath is not to be taken lightly.....

    Gladstone finally at the bottom of the market: HTW

     
  14. Eric Wu

    Eric Wu Well-Known Member Business Member

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    hi @Orion, thanks for sharing your journey with us, what a brave person.
     
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  15. Jingo

    Jingo Well-Known Member

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    Hi Orion,

    I always enjoyed reading your posts on Somersoft and the phone chats we had all those years ago. I remember our chats about the Mini Boom that occurred in Melbourne around 2007-8 or so and both of us trying to work out where to buy.

    I'm glad you're getting your 'mojo' back and working out some plans to move forward. You've still got 3 Vic Melb properties - which is terrific.

    I've had a read of your Options above. Personally I like the idea of scaling back the risk and selling both your Gladstone Properties and one of the Melb properties to increase your cashflow. Have you modeled your debt and cashflow position if these properties were sold?

    I know you mentioned that following this strategy doesn't lead to a tax effective outcome, however, if the remaining Melb properties are spinning off cash, this can't be such a bad thing. It may then be possible to use part of the positive cashflow to pay down your debt and then buy a PPOR. This would give you flexibility and not paint you into a tight financial corner when you start a family.

    If you were to invest in futher ip's, would it be possible to seek out a strategy of buying cashflow positive properties - perhaps similar to the type that Euro advocates in his posts? The strategy is to pay down debt over a period of time, leaving an investor with an unencumbered IP, producing retirement income.

    If you were to invest in shares, would it be possible to set up a new discretionary trust, specifically to buy shares in? You could then invest in Index funds such as VAS or Listed investment companies with a proven track record such as the older LIC's on the ASX. (Or both) These include Argo, AFI, AUI, BKI, Milton and Whitefield. Each of these pays a dividend of around 4% which is fully franked. The best thread to learn about these is under the other Asset classes section and is called LIC's 2017/2018. The contributors are highly experienced in investing in these shares and many have sold down property portfolios, using the proceeds to buy these income producing assets.

    The other possibility is to contribute to super and invest in LIC's and index funds through a SMSF. You would then be invested in:

    1) Residential Property 2) Shares through a Family Trust 3) Building assets/shares in a SMSF.

    Personally, I'd steer clear of investing in risky areas such as the US. But I am risk adverse. If you decided to go down this track have a meeting with MTR. She is highly experienced in this area, with many contacts and advice.

    Perhaps you could set up a spread sheet and model some scenarios based on investing in Residential Property, Shares and Super, using your salary and anticipated savings each year as a guide to how much you can afford to invest into each area, while maintaining an enjoyable lifestyle.

    Kind regards

    Jason.
     
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  16. ORAC

    ORAC Well-Known Member

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    Hi @Orion,

    Thanks for sharing your story, I truly empathise with your situation. Your story reflected my own experience to some degree. In my 20s, accumulating a number of investment properties but things going awry later on, where I became very disillusioned with property, and had to regroup, reflect what I had experienced and relearned.

    Anyhow, what I decided to do was basically sell everything and revert back to one property, in this case, I chose one of the properties to be my PPOR and established the outcome to have a moderate loan and most equity and lived in that property, enjoying the experience of having my own PPOR. (The alternative would be to sell up and keep one IP but you've structured the loan and equity to make it cash-flow neutral / positive, so it's paying for itself and you continue renting elsewhere).

    The next thing I did was focus on my career to develop and improve my skill-set and abilities, which lead to salary increases (hence serviceability).

    I then wrote down all the things I learned and experienced, and then re-read a lot of books and then joined a property networking group to see what's next. This lead me to learning about doing some minor property development like 1 into 2 subdivisions, building new house, renovations etc.

    I also became much more aware about my superannuation and taking control of it, and re-jigging it to make it more effective, and appreciating other asset classes like LICs/ETFs.

    Then got back into property development but armed with a new set of skills for what works for me (i.e. I did a subdivision / new build, I sold my original PPOR (townhouse) to move to a bigger freestanding property and did a renovation, I did a house and land in Western Sydney just before the boom to take advantage of NSW stamp duty concessions etc).

    From the experience, yes - I read all the books but as I mentioned in another post, property investment is an experiential exercise (you can read about it) but you don't actually learn until you do it. Whilst I've been quite wary of "property spruikers", I did do Nhan's course where he drummed in the concept of "failing fast", you only learn when you fail but you recover fast soon after.

    So you could consider your "IP Ver 1.0" as a learning exercise (yes, desirably the outcome would be nice to be better), but you can think about achieving "PPOR / IP Ver 2.0" and regroup from that experience. The main thing with "IP Ver 1.0" is to be in a situation where you are not at a total loss, that you sell / restructure to have something at the end of it - whether one of the IPs becomes your PPOR, you sell all outright / pay off your debts and are left with some positive cash, or you have one IP that's paying for itself (whether its a Melbourne IP or Gladstone IP would be based on net loan / equity / cash flow position but an IP paying for itself) - any one of these outcomes are not too bad.

    As for the US property situation, it's all about risk management and handling another layer of risks. For your regrouping, consider it is another layer of risk that you probably shouldn't contemplate at this stage. It seems your consideration of US property is as a "quick fix" solution, rather than stepping back and working out what you've learned from the Australian context and re-strategising from there.

    So in summary:
    1) Sell the lot, or sell what you need to achieve for one cash-flow positive property, or an IP that becomes your initial PPOR.
    2) Continue to develop your career skills for remuneration increases and hence serviceability.
    3) Reflect on your experiences to write your own "lessons learned" and what property investment means for you - what is the goal?
    4) Have a look at your super and see how best to develop this.
    5) Consider other asset classes like shares/ETFs/LICs.
    6) Get back into property investment but with a defined set of strategies / tools / approach. Consider upskilling into minor development opportunities (E.g. renovation, build new, small subdivisions).
    7) Find a networking group to share the experiences, not "spruikers" as such, but people like us doing property investment / development type projects - don't be a lone ranger.
    8) Keep fit and healthy, and enjoy life!

    Hope that helps.
     
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  17. Vicki S

    Vicki S Well-Known Member

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    Good idea to sell the properties in Gladstone and reset.

    Seek advice but shortfall on the loan may be deductible? That is after all the sale proceeds are applied to the loan, money borrowed to extinguish the mortgage on the Gladstone prop may be an ongoing interest deduction. Seek tax advice.

    This property game can be one step forward a leap backwards and then forward again.

    Do not forget your super as mentioned, a major retirement asset many neglect......

    Learn about other asset classes too, if you are a good saver, they can pay nice returns without the debt weighing you down.
     
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  18. WattleIdo

    WattleIdo midas touch

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    Thanks for your honest posting Orion - you've elicitied some amazing responses.
    My thoughts are similar to others above
    • consider selling one or even two of the SE Melbourne properties - now is a very good time to do so.
    • I would be hesitant to sell in Gladstone at this point
    • However, if the profit from the sale of the Melbourne properties covers the losses made with the Gladstone properties, then I might try to balance it out and sell all
    • If possible, hang onto one of the SE Melbourne properties
    • Once you've sorted all this, take a break by going slowly and one step at a time, each step being positive.
    • You are lucky to have started young and have many positive experiences going for you. And you're still young.
    • Be very careful in following others' advice, it may be time to work on this more - away from money and people who prioritise it, and into some other areas of growth for a while.
     
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  19. New Town

    New Town Well-Known Member

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    Bloody Gladstone!!
    And we used to call it happyrock :(

    Even the prices you quote s value of $360k seem high in Gladstone. But could you stay on the current course for say another year, rather than selling, just continue paying down debt? Vacancy rates are tightening so...who knows

    The US concerns me as it could do your head in trying to get set up in a different country.

    best of luck
     
  20. Orion

    Orion Well-Known Member

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    Thank you. I hope so too. Yes, I did get caught up in it all, I thought Gladstone was going to be the next Karratha/Port Headland. How wrong I was!

    In fact, for those who are interested I was recently interviewed for a podcast on my experience - I will share the link when available.

    Agreed. I'm fortunate to be on a reasonable income, although I've never been poorer cashflow wise. It's just all gone into these duds. It really does weigh on you mentally after 6 years. I only want to proceed with better cash flows from now on (which is what I was going for with the high yield Gladstone properties, .

    Agreed. This is where the financial planners are helpful, being that third party to keep me in check. I just like to think of my end goal (high level), although I'll readjust as I go.

    Thank you. Yes, I too have been pondering this many times and have discussed it over and over with my Property Advisory and Financial Planners. Buying at the peak and selling at the bottom is the worst thing one can do, although combined both of these properties are costing me -$40k per year (not deductible due to family trust) and have no real medium term outlook for additional growth.

    Where we landed was that property prices are perhaps 10% less than pre-boom prices (which would probably be 'fair value'), so there is a chance they could rise back to these over say a 2 year period (growth of $80k), although it'll definitely be an additional $80k in negative cashflow, neutralising any gain.

    The biggest loss I've experienced according to my Property Advisory has been the opportunity costs, investing today in say Brisbane, Adelaide, possibly Perth they believe it's likely to achieve 6-8% pa in these markets over the next 5 years or so. Back when I bought these Gladstone lemons they were buying Art Deco apartments in Bondi for the same $600k or so, which are now over $1m.

    Thank you ORAC (and others). Your posts are very helpful and much appreciated.

    I totally agree, and I think this Ver v1.0 and Ver 2.0 is a great way to think of it.

    Re-reading my investing books (which I have many of). I have started to do this and they all take on a new light with the benefit of my real experience.
    Selling to get back to a more comfortable cash and cash flow position.

    My biggest lessons here have been
    Number one - Market timing! It really is all about timing in my opinion. Buy in an area that has been dead, not one that has just boomed.
    Number two - Asset risk
    Number three - Levels of aggression (and cash flows) / rate of acquisition. I went all out.[/QUOTE]
     

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