Passive Income From Real Estate.

Pretty tempting at $99K geez. If its a dud, won't be hard to find another buyer at that price.

 

I'm trying to get my head around this.
If you owned $3M worth of IP, all debt free, how would you have a net yield of only 2%?

E.g. Let's say you had 6 properties, all debt free, and worth $500k each. And the rent for each is $400pw. That's $125k in annual rent.
What would the $65k worth of expenses be?

 

Exactly right! It all depends on what the makeup of your portfolio is.

 

Depends on a lot. If it was all houses. Agent fees 10k. Vacancies 5k. Council Rates 10k. Landlords insurance 1.5k. Building insurance 12k (if it was units it would be body corp instead). Repairs 15k. Possibly land tax? Sure all of this is manageable but it's not too far off. The other risk is liquidity. If there is a major incident where your property is empty for a while, you need enough cash to survive. So you need a buffer.

You've also assumed a gross yield of 4%, which is high for Syd/Mel. Buy in the smaller cities? Sure, but will they have the same growth as the bigger cities to get to your 3m goal in the first place?

 

This is why I said:

If you've got innercity properties then you've got low yields, but if you've got fringe properties eg: Mt Druitt, Logan, then the yield's are higher.

 

To help you get your head around this, below I have used actual numbers from three IPs (houses) in our portfolio for FY20 and used the average to smooth out out any lumps (eg maintenance):

Property Management Fees: 8.4%
Council Rates: 7.7%
Water Rates: 3.0%
Insurances (Building and LL): 4.8%
Maintenance: 7.6%
Booking/Accountant: 5.0%
Land Tax: 13.0%

Total Cash Expenses: 50.9%

The average gross rental yield on these property in FY20 was 3.91%

Hence, the average net rental yield on these property in FY20 is 1.92%

That is why I use 4% gross yield, 2% net yield.

I hope that helps.

 

^^^^

With Net yields that poor (and that's pre-incone tax! So, net-net actual yield is EVEN LOWER); why bother at all?

1.92% pre income tax isn't even pacing inflation so your money is worth zero after inflation. I.e. no income whatsoever.

If so, then this means one is banking on solely capital growth/appreciation only (unless they deploy a reno or other income-manufacturing strategy??). To me this seems a fools errand. To buy something like this with zero (effective) cashflow and "live on a prayer" for capital growth only; whilst having taken on the risk of debt/mortgage, to do so.

No thank you. Not for me.

 

correct me if I’m wrong , but even big fish won’t be able to do any better than 50% LVR on a site like that?

And I doubt you can lock-in 3% funding rate unless you have a massive number in residential equity.. otherwise banks/lending institutions might not go under 4.5%

 

The calculation is based on 200% borrowing but in reality you are using other asset as security too.
It's been over four years since I have paid over 4.5% on commercial.
Been 3% and less for a wee while now .

 

As long as they're not whiting too long

 

100% not 200% effective borrowings

 

That is why I wrote way back at Post#3 on this thread:

... and why pay tax?

Accumulate a property portfolio where one doesn't pay income tax. That would be a portfolio of growth properties. Growth is tax free (until one sell, so never sell).

Total Returns = Growth + Income/Yield

Income is tax-free. Growth is tax-free. Total Returns are tax free. That is the tough life of a B+H property investor .

I am not sure where you are getting your numbers from.

The inflation rate hasn't been above 2% since 2014. Even next year, the forecast is 1.83%.

If one thinks the income from property is poor, try cash for passive income. Transaction accounts are around 0.1% - at least at that rate, one is not weighed down with a huge tax bill.

I would rather rely on property for tax-free capital growth using leverage than rely on it for taxable income, especially in accumulation phase.

Yeah, I am a fool. Those three properties are now 2.5+ times what I paid for them.

And I believe they will be worth a lot more in 10 years, 20 years, ... time. I don't believe I am "living of a prayer".

Imagine today's world if they were worth say half what I paid for them.

We both agree that property is crappy for cashflow. So, one needs to generate cashflow from other means/assets. There are many options for achieving this.

That is great.

The fewer people buying IPs, the less properties for people to rent. Then rents will increase. Then I will be paying income tax. Oh no. I will have to buy another growth property. Bugger.

Seriously, each of us has to work out their own net worth journey. I am no longer in accumulation phase but I know my jouney has worked for me .

 

There’s a lot of insights in your posts about your strategy. Thank you @kierank !

how long did it take for those 3 properties to go up 2.5 times?

Would you say holding for a long time help the natural growth process? Or also manufactured growth?

 

They were bought at different times plus each has achieved differing growth. Hence, not so simple to work out.

I would say an average of 16 years and an average growth of 5.8% pa compounding.

With inflation running at 2%, I would have like 7%+ growth. So, they have performed a little less than I would have liked. But, I need to remember that in this period we have had two major financial crises, with the GFC and now COVID.

So, total returns of just under 10% pa compounding is nothing to sneeze at.

If one truly understands compounding, long term hold is what it is all about IMHO.

For example, if one buys $1M worth of growth asset today and it grows at 5.8% pa then:

• After 1 year, growth is $58,000
• After 5 years, growth is $325,650
  
• After 10 years, growth is $757,350
  
• After 20 years, growth is $2,088,250

The other thing to remember is that, if one holds the growth asset for a short period of time (say 1 year for property), its value might go up, might go down or might flat-line.

But, if one the holds the growth asset for a long period of time (say 20 years for property), its value might boom/bust/flat-line two or three times in that period but those lumps and bumps will even out.

When I was in accumulation phase, I was way too busy running/growing my businesses (my cash generators). So, I didn't have the time to manufacture growth, nor did I have the knowledge/ skill/experience to undertake that approach.

In other words, in that phase, I was an active cash/income generator (from businesses) and a passive capital growth generator (from property).

Now, in retirement, I am a passive cash/income generator (from shares) AND a passive capital growth generator (from property).

 

Me neither! But @kierank has more expensive properties than me, judging by that large Land Tax amount.

My expenses are a lot less, and my yields higher. After selling the next one, I may even be down to NO land tax.......and that's with double digits of properties still in the portfolio.

 

Anything bought in Sydney & held for a long time has gone up a similar amount. It is the holding of the assets through the booms that creates the wealth. For instance our first IP was bought in 1998 for $96500. Worth around $600k now. Wish I had more money in 1998 and had bought more, but we weren't able to buy anything else for several years after that one.

We were lucky because we bought that just before a large increase in prices....but income wasn't sufficient to take advantage of it.

 

Even though I don’t like paying land tax (BTW, I don’t like paying interest, rates, PM fess, ...), I see land tax different to most other people.

High land tax means high land content. Land appreciates, building depreciates. So, as a B+H investor, increasing land tax confirms that I have the right growth properties in our portfolio.

For me to get rid of high land content IPs (and buy lower land content IPs) just to lower land tax is like taking a salary cut just to reduce one’s income tax .

Not saying others should do what this old fart does .

 

I look at it differently. When we started, we didn't have the income to buy anything that was close to the City, so bought what we could afford. It was not in a good condition, and bought at auction. Land had little value, and it was cashflow positive from day one after all expenses and a quick tidy up. Watching it go up in value was brilliant, and propelled us to buy again when we could afford it.

Due to our low income, everything had to be cashflow positive, so we looked for similar qualities in the properties we bought. It worked, and as the income increased we saw little reason to change something that was working, so most of our portfolio tended to be on the outskirts of cities. Mt Druitt was where the bulk was, as it was just easy for us.

Land value was negligible, so could hold several before touching the land tax threshold, but the beauty was in the fact that as Sydney prices increased, so too did the outskirts, so we got both a decent yield AND CG.

Like you, I really don't like paying all of the other fees so I've bought in different States to minimize Land Tax and have had the same results in other areas, though not as good as Sydney.

 

^^^^^^
That is why I posted:

There are many ways to skin the net worth cat - the main thing is to start skinning