Next Steps

Hi, I am relatively new to property investing and have started to take a more serious interest in it over the last six months. We currently have 3 investment properties (all in regional Victoria) and rent in Melbourne. All three properties are positively geared and on P and I loans
A) $304K owing valued $450K Rental income: $18,720 p.a
B) $344K owing valued $380K Rental income: $28,080 p.a
C) $115K owing valued $260K Rental income: $11,960 p.a

My wife works full time, while I work part time and look after our young children. We are in our early 30's (31 and 32) and have no plans to stop working before 60 as we enjoy our work. We currently have around $2000 a month in extra cash each month and are trying to work out what the next steps should be for us? I

I do see us renting for probably the next 3-5 years as we will be moving around, but after that we would like to buy a house to live in. Should we be trying to to purchase another 2-3 houses in regional areas over the next 5 years, purchase a more expensive house closer to a city or keep paying down the principal on our existing loans?

Any ideas or tips would be greatly appreciated.

Thanks

 

I think you first need to understand what you can actually afford. This will help figure out the paths that are available to you. See a broker who can look at different options for you and do some planning based on that.

One red flag raised is that of paying down principal on existing loans. I don't have a problem with investment loans being principal & interest, but if you're making extra repayments I'd suggest doing this via an offset account rather than direct payments to the loan. There's lot of reasons to do this but fundamentally you might find yourself in a better tax position down the track.

The decision of buying more IPs vs your own home might be dictated by borrowing capacity but also what's important to you. It's possible that buying more IPs in the short term might block the purchase of your own home. It's also possible that you might need to employ an investment strategy with a goal to making money for your own home.

This all comes back to the first step of understanding what is actually within your means, which is seeing a broker to understand your financial parameters better.

 

As above, purchasing more IP's will reduce your borrowing capacity and available deposit to purchase your PPOR.

What income are you aiming for when you reach 60? How does your current income trajectory look?

Best to work out the end goal, and work backwards.

You'll likely find you will need to take on an active investment approach to hit those targets, especially being in the early side of 30 with home, kids, and education ahead.

A possible mixed strategy is to buy PPOR, and renovate to add value. Can do it perhaps once or twice (talk to accountant), and keep chunk profit tax free.

It will be a balance of creating capital, and increasing cash-flow. The simple buy-and-hold strategy in the current market will require sacrificies to your bigger picture. To hit all your goals, you'll need to sacrifice now and do things well outside your comfort zone.

 

If purchasing a PPOR down the track is the aim of the game then purchasing more IP's now (if you're able to with your borrowing capacity) will likely hinder your chances of servicing a PPOR loan in the future (unless your incomes go up by a fair bit and/or you're willing to sell off some of those properties).

The reality is - it's bloody tough for anyone to purchase multiple properties in the current lending environment and CF+ properties aren't going to help a great deal as lenders a) apply an assessment rate to your current debt which artificially increases the repayments on their servicing calcs and b) cap the yield that can be used with the rental income you receive.

Cheers

Jamie

 

Totally agree with all the excellent answers above - you should seek advice from a broker to determine the implications to your remaining borrowing capacity if you do purchase another 2-3 IPs.

The other thing to consider is what are the likely changes in 3-5 years that could impact your financial situation. As an example:
- Would you be changing jobs, or going full time so that your income will improve?
- Your children will be attending school then - will it be public or private school? If private then school fee means you have much less cash leftover.

These will be the type of questions that a broker asks when you sit down with them, so definitely the first step I recommend before making any decisions.

Cheers,
David

 

What is active investment in IP domain?
Is it,

• Buy old house and renovate to add value?
• Buy old house with sub dividable large land holding, demolish, sub divide, build and sell?
  

Does it work in a down turn in terms of risk reward?

 

In an attempt to stay succinct.

1. All of the above, + more.
2. What, depends on skill, and risk profile.
3. If the numbers say yes, then yes.
4. It’s not easy, or straight forward.

“The easiest paths lead to busy places.”
“The obstacles you overcome, become the moat that separates your success from other.”

The missing pieces:
Assuming a 20% drop in prices over 24 months.

1. Increase Margins. I know a builder. He looks for minimum 20% profits. He also has a 15% builder margin. Total 35%. He can buy-structural renovate-sell in 6 months. Is he making money?

No builders licence? Work towards one, JV with someone who does, flip deals to builders, build commercial.

What if you find a place with 40% profit margin? But how? Are you that guy that can squeeze in that 1 extra town-house? Perhaps you know how to not have to buy that easement saving lots of monies.

Now to be clear, none of the above apply to me. I know a handful of people who do this. They are very experienced, and even they tell me they are having trouble finding good deals. In Sydney.

2. Markets within markets. Market Inception? 4 bedroom, 2 bathroom, mega-mansion only yielding 3.5%? What about building dual occ. No? How about boarding house. Numbers don’t stack up? Child-care centre? You don’t have to limit yourself to a cookie-cutter home.

There are MANY ways and things to invest in within the realm of real-estate. Learn about different locations, and type of investments.

NGBH rules just changed with new parking requirements. This has created a lot of turmoil in this space. The co-working space is also going through some changes for the last 12 months from what I hear. I have heard of some decent child-care centre sites a few months back. Where there is turmoil, there is opportunity.

"Sometimes you just have to survive long enough, to become an expert." The Messy Middle - Scott Belskey

3. Different markets. Don’t like looking for a needle in a haystack? Try Colombia, or Nigeria. The world doesn’t revolve around Sydney. Just because Sydney and Melbourne have a down-turn, doesn’t mean USA or Cambodia are in the same boat. Expand your horizon, tax-deduct that future international trip.

4. Just be different. Diversify into different investment streams. Shares, business, illegal substances. Totally not condoning illegal substances. There is no rule you have to stick with one investment vehicle. There are many other means to generate income whilst Sydney has its hissy fit.

I personally have no current interest in investing outside of Sydney/Melbourne. Chasing a 10% gain in Tasmania next year, holds no appeal to me when looking at the long-term.

I stopped ‘investing’ in real-estate in 2012. I changed my question from ‘how does real-estate make me money', to ‘what are some problems in the real-estate space, and which one can I solve’. Likely lead you down a more profitable path.

eg.
First Australian co-living properties set to open in Sydney

https://www.thecapsulehotel.com.au/

*disclaimer* I know nothing about the above business models. These are just examples.

On a smaller scale, I have friends doing developments in NSW, mostly using options, and JV's to purchase the property.