Our current situation: what would you do?

Not if the money is borrowed using the IP as security but the funds used to pay off the PPOR.
Marg

 

Agree 1000%. The penny just doesn't seem to be dropping for a lot of people unfortunately.

Unless you have a plan to smash down debt or increase equity significantly just holding property and hoping is going to be a fools errand for at least the next decade.

 

It requires a complete culture shift. Just like when a company has to change direction dramaticallybecause its business model has been disrupted... the ability of the management and employees to make quick change is the make or break. Embrace it and survive. Resist and perish. Think Kodak, Nokia, Video Ezy, Blockbuster, or even Taxis. Property investors are struggling with the culture change required in the post APRA era

Essentially, the business of property investing has, for nearly 30 years , been facilitated by credit expansion. Location, supply v demand, infrastructure , immigration /population and whatnot are what most people have believed were the drivers, but ultimately it was the ready availability of cheap and easy credit that underpinned everything. Every rate rise has seen growth slow. every rate cut has seen growth accelerate. If you change the game and introduce deliberate regulations designed to slow down, choke off or limit credit availability for many, the entire model , and the results it produces, needs to be reconsidered.


Imagine that I have the very last cup of coffee in Australia. A steaming hot, fresh latte or flat white or short black or whatever blows your hair back .... and imagine that 25 Million Australian coffee addicts want it. Now, if I paid $5 for it, I should be able to sell it at a very, very, very tidy profit, given its rarity and the demand /appetite for what I'm selling, right?

Now, imagine two credit environments;

In the first, everyone can borrow $6 today. Next year, everyone can borrow $7. The year after, everyone can borrow $8. Under those circumstances , the rarity /undersupply of what Im selling means that the price will rise aggressively, and I can make a tidy profit quickly. The buyers can in turn sell at an additional profit within a few years, and so it goes. This has, at a simplistic level at least, been Australian resi property for @ 30 years, since deregulation of the late 80's, all fueled by massive increases to leverage facilitated by 80% LVR expanding to 90% LVR and then 95% during the 90's) and huge borrowing capacity imcreases due to rate cuts throughout the 90's and noughties, and double income families and FTB and ever more aggressive servicing calculators....

Now, imagine a credit environment where very few can borrow more than $5. And next year, some may actually only be able to borrow $4 when they need to refinance as I/O periods expire...or worst case they may not be able to refinance at all... LVR's have nowhere to go. rates are bottomed or near bottomed. Incomes arent growing , and servicing calcs are being detuned everywhere, almost without exception.

This is the nature of the disruption that we have started seeing roll through property investors. The business model of the last 30 years is being disrupted. Simple as that. But it doesnt hit everyone at once, hence the failure for the penny to drop. It takes time for the disruption to work its way through the market . For many, the penny will only drop when they next need to borrow, or refinance, believing equity = borrowing power. It always has in the past, because for the most part, equity has been easy to harvest year on year due to ever increasing borrowing capacity.

Not so much, anymore.... no sir....

This is why I continue to recommend that anyone still accumulating a portfolio, and who still has some dormant equity and the necessary borrowing capacity to harvest that dormant equity , should be buying high yielding cash cows so that they can reduce debt aggressively. Because once the ceilings are reached, its going to be a loooooooooong time before capacity starts to return again. Ultimately, those who deleverage will be rewarded by being able to continue to borrow.

You only need look at the example on this post to see all the that you need to see.

 

...and that is why we will see a change in the property markets, if you can not source finance you can not buy, therefore we will see more supply = slowdown

Yes, cash cows important, diversifying, different asset classes, think outside the square

 

Or instead of cash cows you could build additional dwellings to add value. I believe you have done this successfully in the past @MTR?

 

Ya... for sure, for sure.... for those of us lucky enough to be well past the accumulation phase, and with sufficient assets to see us comfy for life...

But for those relatively new/inexperienced, and still carrying PPOR debt, hoping to get ahead of the curve and not work 9-5 until they're 70, what Im trying to highlight is the need to put cash flow /debt reduction front and centre early on in the accumulation phase now.... it wasnt very important pre APRA. Its critical post APRA.

For those who are well advanced, perhaps not so critical, as they are already fairly well set ....

 

Yes that could work too , but for many, dealing with subdivisions or councils etc will be too time consuming and stressful and intimidating.

Gotta source the right property...settle it, then try and get the secondary dwelling done... realistically whats the turn around time on these? For some the process may seem all too hard...

Alternatively, purchase something ready to go... cash flow in place from day 1.

It would come down to the level of effort people were willing to put in. Point is... however you choose to do it, manufacturing extra cash flow so you can pay down debt, is super important now.

 

Fair point. It depends how much time someone is prepared to put into it. I have not put much time into my first build so it took 2 years to get to pad down. My parents are at lockup 8 months after buying a block. Some submit plans before settlement, so timeframes really depend on the individual.

Possibly. It would depend on the deal though. There could be a premium attached to buying a ready to go or you could be buying below replacement cost in Perth right now. Even some of those deals don't stack up. A high cashflow may also mean low capital growth potential or it may not. Lots of variables that can catch out inexperienced investors

Agreed.

 

The P/L owns the property, the P/L is trustee for the family trust. The properties are rented, so yes income producing.

 

Thanks @euro73, I love this analogy! My initial plan was to keep developing, hold one sell one, but it's obvious that at some point borrowing capacity will run out, being CF neutral is just not enough!

Selling all our IP's might mean a hit on the tax front but I'd rather that and mitigate risk in the post APRA environment, holding doesn't make sense until our PPOR debt is paid down.

Thanks for the clarity, just what I needed to hear.

 

If your properties were CF+ you could hold and reduce debt simultaneously. Shame you need to sell to reduce debt.

 

Agree... You have to weigh up the time taken to develop vs buying something ready to go and what that cash flow will be over the same period of time to develop. Fortunately I've been able to get 2 projects through council and built in 12 month cycles, the gain has far outweighed any cash flow from a rental.... BUT can't make the next move until we sell and reduce debt