New strategies post APRA

Difference is, WITH ALL YOU POWERS COMBINED... you can't affect the economy. You can however, work on yourself, and your business.

Nothing funny about business. Not even a comedy business. It's very very very difficult to succeed. It does however, give you a chance.
If your attitude is that business is speculative, you've got the wrong idea about business. That's gambling.

I have a slew of failed businesses behind me. My current one would also have eventually gone under, my girlfriend however is a wiz at day-to-day admin. This is what has made it succeed. My skill-set is setting the formwork, and pouring the concrete, she does the finish, and polishes off the path.

As my first business mentor told me, "not everyone is made for business, most will fail". I took it personally for a while, I really thought he meant me.

You don't trip and fall into success. It's a hard slog. You need both the ability, and the grit to keep going. Many with skill give up before they succeed. Others keep going, and will never make it as they don't have that skill. Though the latter is rarer than the former.

Also you don't SUCCEED in business, there is no 'other' side. You Just. Keep. Going. until you don't. (eg. Sega, Blockbuster, etc).

You don't know what you are doing when you start ANYTHING. You will have done it before when you've stuffed up a few times.

Ask yourself...

As @Ace in the Hole states, 'if it was easy, everyone would do it'.
How many pure buy-and-hold investors do you know have retired on a solid passive income?

1. Did they have lump-sum come their way?
(inheritance, sale of business, lottery, rezoning)

2. Did they have high-cashflow?
(super high PayG, business)

3. Did they subdivide, renovate, develop?
(this is a business)

4. Did they do it in the 27 years or so of unprecedented growth in Australia?

I'll be amazed if the above wasn't involved.
Which of the above can YOU replicate?

 

Personally I don't think theres an 'issue' so much with serviceability in Australia, its on balance where it should be. I do think overdoing living expenses is daft and misses the balance between simplicity/efficiency goals vs perfect credit quality. This seems to be driven by lawyers who have a fondness for overregulation with little understanding of the economics of financial stability. They're not qualified to make decisions here and should simply ask APRA what they think and let APRA decide the best approach. APRA seem to get this (the specialists) and hence rely on standardisation given the simplicity benefits to consumers/system vs the systemic risk HEM reliance causes (minimal). Hayne/politicians/etc are not experts in this field.

Leveraged investors may not agree with the current serviceability framework, but the policy settings generally there to protect them against changes in future circumstances. Lenders competing with each other based on serviceability calculators is probably a governance failure from those who aim for financial stability. In general, for every investor that manages risk really well and protects against the downside, there's plenty of investors who don't do this well at all. Especially young folk with higher risk appetites and little understanding of debt dynamics over time.

You will see differences in credit policy over time, marginal changes I suspect. These are small bends to the rulebook, nothing major.

Realistically the biggest driver of servicing calc changes is interest rates. If the cash rate moves up to 3% and headline rates move up to 6-7%, than servicing will fall relatively large. If interest rates fall again, that will again boost demand for credit and have a marginal boost to total borrowing capacities. The changes enshrined in the latest prudential practice guideline try to limit the borrowing power impact of rate changes though. Nonetheless, I suspect lenders will bend the rules more in this environment as it becomes a 'smaller' change to reduce assessment rates marginally when rates are very low.

 

I'm sure we've all heard the strategy: Buy 10 properties, live off 1 each year.

Here's the thing...

Buy the 1st IP. Perfect.
Buy the 2nd IP. On top of the world.
Buy the 3rd IP. You're financing with Liberty.
Buy the 4th IP. Sorry, you're at your borrowing limit. Come back again later.
Buy PPOR. Sorry, you're at your borrowing limit. Come back again later.

5 yrs later. No / little / downward growth. Sorry, you're at your borrowing limit. Come back again later.
10 yrs later. Your houses have 'doubled'. So have everyone else's...
You're a MILLIONAIRE... but can you service MORE debt?
Were you able to smash down that debt over those 10 years?
Has your income gone up considerably to service more debt?

Was this a viable strategy?

Alternative...

Buy the 1st IP. Perfect.
Buy the 2nd IP. On top of the world.
Buy the 3rd IP. You're financing with Liberty. You realise this isn't sustainable.
Buy the 4th IP. Renovate and flip / subdivide.
Buy the 5th IP. Renovate and flip / subdivide.
Buy PPOR. Chunk profit from previous deals. Have relatively low debt levels.
Buy the 5th IP. Build 3, sell 2, keep 1.
Buy the 6th IP. Build 4, sell 3, keep 1.
Meanwhile, start business around real-estate which you love. Double cash-flow after several years.
Buy the 15th IP. Build 8, sell 4, keep 4. etc.

Are you gna make mistakes along the way?
Is this a part of your growth as an investor?
Is this a viable strategy?

 

Just curious, lets assume we have a downturn for few years followed by stagnation for next few,
Does the alternate strategy and a 'business around sector which is in downturn work?

 

I don't quite get the question.
Does my strategy work? Dunno. Will keep you posted. Gives me more peace of mind than putting my hands up and wiggling my fingers.

I see it 2 ways.
1. Rely on external forces for your financial security (capital growth);
2. Rely on your own volition for your financial security (adapt as the market changes).

If you're investing, you're already doing 2. At least half heartedly.

It's not a question of business, it's about going through the steps, improving where I can:

1. increase income.
2. reduce debt.
3. save.
4. invest.
5. mitigate risk (the new 5th step, buy my latest book)

I was talking to a friend this morning. $350k+ income. The buy and hold strategy works great for him. Servicing $4M+ debt.

I know a lot more people that can renovate and subdivide, than I do who earn $350k+ incomes. A $350k income that also develops, DYNAMITE!

1. I'd find $350k PayG more risky than business. 1 client. Loose 1 client. 0 clients. $0.
2. No statistics to back this up. I'd propose it's easier to develop the skills to make $350k from active investing, over working your way up the corporate ladder to get it from a PayG.

 

Does renovate/subdivide/flip strategy work in a downturn?
difficulty in getting funds to implement the strategy?
profit margin pressure?

 

If the numbers stack up.

Do a grid variance. Low ball. Buy, renovate sell.

Negotiating on a place in Sydney now.
Don't have funds now. Asked for 2 year delayed settlement.
I think markets gonna keep going down. Offered what I think it will be worth.
Made sure it was positive geared, and in a growth area.
Down side is it's heritage zoning. In good condition though.

Numbers make sense to me. If the other person wants to sell. Sweet. They approached me. I'm not attached.

 

2 yr delayed settlement, Interesting.

Curious, how does it work?
For buyer: locks the price, gets time for increasing serviceability? is buyer obligated to buy?
For seller: Locks the price he will get after 2 yrs?
if so whats in for seller in such deals? a floor for potential price fall? is seller obligated to sell?

 

When you purchase a property, there's a settlement period. Usually 6 weeks?
This is just changing the number 6 to 104. Contracts can be changed.
Why people do it? Different reasons. Always aim for a win-win.

1. Seller was stuck on a fixed rate. Didn't want to pay the large break fee. Was also close to going bust.

18 month settlement. My friend wrote in the contract she would pay the interest, and keep the rent, with permission to renovate. At settlement, valuation was higher, so only a small amount was needed to settle the loan. Had some contingencies in case owner went bust. Not sure what.

Note: It was advertised for $1M. She purchased it for $480k. A property is only worth buying if it's worth it for you.

Fun Fact: Turns out seller was a well known property mentor charging $10k a pop.

2. Sellers mum lived in the property. He didn't want to move out straight away.

I offered 6 month delayed settlement terms. Enough time for him to find a new place.

Fun Fact: I purchased another place his mum moved into. Great tenant.

3. Seller wants to sell. I don't have funds.

I can...
- offer an option
- delayed settlement
- push for vendor finance

Fun Fact: It's a Sydney resi currently positive geared about $15k at 105% LVR. However can only put a small 1 bed granny flat behind. Little value add. Mentors are reminding me to move past that model and wait for development deals.

For every yes I've heard by doing the above, I've heard of hundreds of no's.

The world is your oyster.

 

Appreciate your detailed reply. Thanks

 

Working for me so far and other active investors in the Perth market.

 

Quite a few.... PAYG into super and paid off ppor.

Yes there is much less upside than starting a business, but much less downside. And it is available to everyone (we can't all run lucrative businesses, in fact most of them require STAFF).

 

Yes, there would be a passive approach as long as there are public traded companies, which are required to allow certain businesses to reach their potential and/or make owners filthy rich.

Agree you will have the skill/passion develop first, this does not mean the business will succeed. The weird advice in this thread is not realistic for most people.

 

1. The example doesn't seem to have any IP's in the equation. Sounds like vanguard?
2. Yes. Business has staff/customers. IPs have staff/tenants. Just another thing to learn.
3. Not sure what you're thinking I'm advising... Renovations/subdivisions/developments, these are all businesses too. You don't have to buy a Mr Whippy and sell ice-cream, nor open a chain of Hilton Hotels.

...and for most people, retiring on $100k+ passive income is no more than a dream. Early. Or after 47 years of work.

If you have accomplished it. Or know of someone who has, from pure buy-and-hold. Please feel free to give a detailed breakdown of how it was done. Will be a great learning for me.

 

@NHG enjoyed your posts and totally agree with your second strategy.
I’ll take it a step further though, who even really cares about servicing if you only ever hold no more than 2 properties.

I personally never want an investment property with tenants. So my plan is to keep reducing debt on my PPOR whilst utilizing the newly created equity to do a development, sell, reduce, rinse and repeat.

Now I have only done this once so far but took pretty much 100% LVR and got it down to under 60%. I’ve just topped back up to 80% to go again.

I don’t think in current market 40% is possible because that all happened in a huge market increase but even if 20% is achievable over 2 years....in 10 years th goal is to have a fully paid off PPOR worth by then hopefully nearly 2mil.

To me that’s investing. Not purchasing a buy and hold and letting the market dictate the outcome.

 

Awesome. Sounds like you're in the business of real-estate.

Mind me asking. What was your profit margin, and over what period. How much do you now have STUCK as 20% in your loan.

Let me know. We can then do a comparison to say, the equivalent $value purchase in Logan.

With your strategy, 2 things:
1. I still believe it is worth holding stock. Means you can ride the wave up and make some free money. You can still borrow against it for future developments.

2. How did you structure yourself? Did you take the profit as a lump sum? If you funnel it through trust structures, you can pay yourself over time as a Project Manager, and use the funds to INCREASE your borrowing capacity after 12-24 months. If you take it as a lump sum, you cannot.

General Note:
Buy and hold is like going to the gym and only working out your right bicep.
Yeah, you get a result. A killer right bicep. However you're probably plump, and totally out of proportion.

Getting your savings rate up nice and high, and finances well organised is the eating healthy part. 80% of the job done.

Then go and educate yourself by reading books, attending seminars, asking questions on this forum. Do this concurrently whilst going to the gym, do squats/bench press/dead lifts (income), then work on the smaller muscles (buy-and-hold, shares, etc).

Once you go past the buy-and-hold model, there is SO much more to learn, and so many amazing things you can do. That's when property gets REALLY fun.

 

Some great advice for a starter like myself. Whilst I'm starting out with small achievable goals with a basic buy and hold strategy I feel this will slowly morph into a more 'active' approach in future as you've discussed. I feel uncomfortable having the convo around 'retirement target' and 'passive income goal'. I think adaptability is the key whilst gaining experience and educating yourself.

I feel a lot of people on this forum have a killer right arm. Although I doubt it's from doing bicep curls.