Newbie Goals & Approach

Hi all, I am new to this, although for last few years been reading lots of investing books including property books and lurked on previous forum. Never could pull the trigger on property previously, but a mindset shift is making me think its time.

I want to start with an end goal in mind and an initial plan, not just buy an IP for the sake of tax purposes. So to get a better understanding of the basics, I have put together some high level 10 year financial models so I could look at the cashflow impacts, negative gearing etc, before I talk to any brokers. I am not a finance guru, just anal about my personal budget.

Starting point

• 300k available for a deposit(s)
• Me late thirties, partner late forties
• Both High Income Earners
• Neither of us have IP or PPOR , we rent - and don’t intend to buy a PPOR together in Sydney, unless there was a significant drop in prices where we currently rent.
• We both have other assets classes as part of our individual investment portfolio's

Goals

• In 10 years have $4 million in property with $2 million as equity
• In 5 -6 Years move out of the rat race of Sydney and buy a PPOR in QLD somewhere, I don’t expect to be retired at that point, but expect income will be significantly lower

So I forecasted over 10 Yrs... buying 5 IP’s in first 5 years to the tune of $2million: in summary

1. Buy $1-$1.2 million worth in the next 12 months (2 IP’s ) - we have the cash available for deposit and I believe this is serviceable based on salaries
2. $1 million more in property over next 3-4 years (3IP's) - use some cash for deposits each year, but mainly leveraging capital growth from portfolio
3. All 5 properties intended to be CG Buy Hold so: 7% annual Growth, and 4% rental yield used in model for all properties
4. Operating expense of each property = 40% of rent
5. I included a few interest rate rises over the 10 years (max being 7%)

Can anyone comment on my numbers or approach above, i.e. achievable?, too aggressive ? way too simplistic?

I am not sure on the best approach to buying a PPOR in 5 years time and how that could fit into my strategy, so haven't yet modelled that. I might need an exit strategy (phase 2 of my research!)

I appreciate i still have a lot of knowledge to gain, but I am right now just trying to understand what might be achievable given salaries and cash on hand, and see if I am comfortable with the risks.

Thanks in advance for any advice.

 

I would personally adjust the overall average performance of your properties down by 1%(either 6% growth/4% yield or 7%/3%). If you managed to get 11% total that is great but I'd rather be more conservative and have a better looking picture than be slightly over and feel the pain. If you were going real conservative try 6% gain 2.5% yield (if buying Syd, Melb, Bris). However I generally work off a 6/4 or 7/3 spilt and conservative outlook would be 6/3 (1% lower than the 10%).

Have you documented all buying and ongoing costs (inspections, stamp duty, insurances, PM fees, mortgage, rates etc) and how did the numbers stack up?

Interest rate, I agree with 7% as a good basis again just run the numbers at 8% but I would use 7% as my figure.

Have you added into your calculations a letting period? I would typically use 2 weeks for letting (even if the place had been rented for 10 years) as again look at the bad picture and you wont feel the pain .

Otherwise I think your numbers are pretty much on target and is doable if you commit to it .

Good luck!

 

Thanks a million @Big Will I will adjust the performances. Have definitely included setup costs stamp duty etc. I took an arbitrary number of 40% opex based on some other reading I have done, but will do a more detailed calculation now ensuring the things you have mentioned are covered !

Yeh committing is going to be a bit of tricky one. Will need to do some more detailed planning to improve my confidence. This give me a starting point to speak to broker and research actual properties.

Really appreciate your input

 

All good, if you are buying quality assets it not always about timing of the market but rather time in the market.

You would be kicking yourself about missing out on Sydney. Imagine if you bought 5 years ago when it was just cruising. FYI not saying go buy Sydney now.

My dad bought a property in Brisbane and for 8 years it hardly moved (paid 125k and was estimated 150k after 8 years!) Everyone told him to sell it was lemon, well next 5 years it quadrupled :O.

Of course would of been better if he bought 8 years after he originally purchased and reaped the benefits but everything is easier in hindsight.

 

Hi Zebedee,

On your questions

1. Buy $1-$1.2 million worth in the next 12 months (2 IP’s ) - we have the cash available for deposit and I believe this is serviceable based on salaries. If you have the servicing, this is doable. Doable. Based on 12% deposit and 5% purchase costs (stamp duty, conveyancing etc). You will need around $170,000 to $204,000 cash to complete these purchases. You could go 20% deposit and 5% purchase costs but this would leave less of a buffer.
2. $1 million more in property over next 3-4 years (3IP's) - use some cash for deposits each year, but mainly leveraging capital growth from portfolio. Doable, if servicing is there and adequate growth. You can also manufacture equity through cosmetic renovations etc
3. All 5 properties intended to be CG Buy Hold so: 7% annual Growth, and 4% rental yield used in model for all properties My suggestion is do the math based on 4% rental yield, including all holding costs and see if you can stomach the negative cash flow. For your reference, a $500,000 at 4% gross yield could be around $6,000 to $8,000 in the red each year. Have 5 of these and the cashflow might be taking some hits. CG is speculative. You can model 7%, but from past data, growth is in spurts so we can have 2-3 years of good growth followed by flat periods. The question is can you hold those properties for that flat period.
4. Operating expense of each property = 40% of rent I would run actual expenses, so include mortgage repayments, property management fees, insurances, council & water rates, estimated repairs and maintenance, strata if applicable
5. I included a few interest rate rises over the 10 years (max being 7%). Great, plug that into the cashflow and see what you get. Based on the example above, could be around $15,000 negative per year

Hope this helps,
Michael

 

@Big Will yes absolutely kicking myself, have lived in Sydney since I emigrated 7 years ago, when I got here I couldn't believe the house prices and just couldn't understand how they could keep going up, so I have been "waiting" ... lol... lesson learned. And now, definitely not on the buy list at the moment - crazyness.

Just have never been able to get my head around having that much debt for a PPOR in the areas I wanted to live (was taught debt was bad!). Property investing in the UK isn't as big as here so not really been on my radar until the last few years. In the meantime though I saved a lot of money, doubled my salary in 6 years.. just haven't been making my money work for me effectively which I now understand. Timing is right, the AUD had tanked against the GBP so nows the time to move money over here and take a more active involvement in my investment portfolio which will hopefully include property.

@Michael_X - thanks very much for taking the time to provide feedback
1. I do have extra cash or relatively liquid buffers over and above the 300k earmarked
3/4. My numbers were repayments + 40% OPEX which ended up with a bigger red number than yours, but agree I now need to go do some more detailed expense calculations as it was a bit simplistic.
3. Can I hold.. good question, I need to do some more scenarios to double check that is something we think we can handle as that is one of my main concerns. My partner has a higher risk tolerance than me
3. Growth in spurts - yeh that was one of my concerns I feel just applying 7% annual was too simplistic in my model, I guess worst case if i don't get decent gains on my first 2 Ip's the next few will just have to be delayed and I would have to reassess and adjust strategy/plans accordingly.

Thanks to you both , really appreciate it.