Nathan Birch STRATEGY

We've all heard of an seen Nathan Birch by now.

There is a lot of info on the forum about HIM, His CLIENTS and his PURCHASES, but this question related solely to his strategy.

Do you agree with the strategy of buying a cashflow positive property and using said cashflow to re buy?

I would imagine the cashflow would need to be circa 20% above the repayments as most lenders only use 80% of rental income?

If your outgoings including I/O repayment were 200/week and the rent 240/wk Would this make you effectively Serviceability Neutral and you can continue to buy?

As a low to medium income earner, do you have an alternative strategy?

Currently thinking, Mackay, Rockhampton, Townsville, - south of Perth and parts of Adelaide.

Thanks

 

The problems on servicing in addition to the rental income shading - is that the repayments are stressed at the actual rate +3%, and needs to be demonstrated on P&I repayments not IO.

At a principal level - need to think of borrowing capacity as a finite resource.

 

no

Definitely not. You have to take into account other expenses and you would you need around 12% yield for a property to have no affect on serviceability.
But the majority of lenders will now cap rents for servicing at around 6% yield - if you get more they will still only count 6% of the rent.

 

6% Capped rental yield on lenders servicing calcs is a killer for this kind of strategy

 

A strategy which may have worked 20 years ago isn't necessarily going to work in the post-APRA environment.

What changes or tweaks would you do to make the strategy relevant to the current investment environment?

 

This is a great question and maybe one of the finance gurus may have an insight?

I wonder if a council approved secondary dwelling (granny) will overrule the 6% yield cap?

 

I think of rental yield as a return in exchange for risk - so for example commercial property tends to yield more strongly, but then is at (arguably) greater vacancy risk. Similarly, these 'cashflow positive' properties might be located in areas that have less economic scale and diversification, and/or lower socio-economic tenants - which means more risk (vacancies, damage etc) and less predictable odds of decent capital growth.

I notice these properties are sometimes marketed by spruikers to folk who perhaps are more serviceability constrained (and also trying to find ways to participate in property investing), plus are very open to the prospect of an investment that gives some supplementary income along the way.

 

Go to non-APRA lenders (at your own risk).

 

no

 

This is a good point. I'm struggling to let go of a heavily offset mortgage on my PPOR as i like to think of it as a "rainy day fund" and it is severely impacting my serviceability for IP 2.

If borrowing Capacity is finite, is the only way to "go again" once you have reached you limit to

A- earn a higher income
B- Wait for IP's to be cashflow positive
C- ?

 

If you were to start again today, what would the strategy be? Maybe its a heavier investment in business that real estate? A realestate investment is a byproduct of a successful business?

 

C = debt reduction - namely any non deductible / OO debt
Regardless - the answer is always YES to A

 

Nathan's cash flow strategy worked because he was rather shaddy in the manner he approached it, not because it worked in its own right. Terry's comments above on the yield you need are accurate, I can prove the maths on this. There was a time where high cashflow could be leveraged quite well, but that went out the window by the end of 2016.

One reason that cash flow strategies have attracted capital gains in the last few years is as prices have increased, cheaper locations have become more popular, pushing up prices. Cashflow strategies generally focus on the cheap end of the market. If there's a correction, these locations have historically suffered significantly as well.

 

Income is always going to help.

Can you define non deductible OO debt? Not familiar with he term Thanks Morgs

 

I agree - Think he got very lucky with the timing, but i do see some merit in inflation creeping the prices up - if you could buy something with 30k down and never look at it again except in 5 years when it could revert to P/I and pay its self off in the next 10. (This is all in theory - there are some terrible areas that could bankrupt you)

 

Totally agree.
That's why I'm working through some strategy here. Im personally sick of renovating and selling. With a young family and now our dream house in Sydney. I'm stuck on what's next and Nathans strategy (not the person) was one to scrutinise closely as at first glance it looks promising.

 

That is a hard question to answer. If I was 16 now and didn't know the future I would probably leave school and become a builder, get a main residence asap and debt recycle into shares for a while. Then I would get a second property, which would be a future main residence. At the same time start up a company to hold properties and keep constructing while studying law at night and start a mortgage broking business asap.

I would also have more sex (once reaching 17)

 

Get rid of any spare credit cards.

 

Ah yes, of course. I forgot how many ppl have car and credit card loans. Debt free over here - thankfully