Positive cash flow

Discussion in 'Investment Strategy' started by CamH122333, 27th Mar, 2020.

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  1. CamH122333

    CamH122333 Member

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    If I have 20% deposit every time I want to buy a property that is positively gear can I keep buying as many as I want without the bank maxing me out ?
     
  2. BuyersAgent

    BuyersAgent Well-Known Member Business Member

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    The finance boffins can explain the technicals but yes that is the idea. Find deposits. Use different banks to avoid 1 having too much power and keep the cash flow across the portfolio high enough that the banks servicing calculators don't shut you down.
     
  3. Omnidragon

    Omnidragon Well-Known Member

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    Yea sure if you lie through your teeth on the bank application and never end up in court
     
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  4. TTT888

    TTT888 Member

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    I bought a townhouse at Slack Creeks for 200k rented for 275pw.. but this property doesnt' go up much at all. However, I bought another house in Strathpine for 337k ...rented for 355pw it has been going up around 400k, now.
    I prefer neutral return but it can give me some growth then a positive cash flow that doesn't give me much growth at all.
     
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  5. euro73

    euro73 Well-Known Member Business Member

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    Simple answer is NO. A more studied answer is "maybe" ...because rates are low enough that maybe, just maybe...if the yield was high enough, it "maybe" could work... up to a point .

    Some points to consider;

    Bank calculators "shade" the market rent by 20 or 30%, meaning they only accept 70 or 80% of the rent.

    Bank calculators assess your debt at 2.5% above the rate you are actually paying. So if you are paying 3% for example, they assess your repayments at 5.5%

    Bank calculators assess your debt over the remaining P&I term, so if you take out a 30 year mortgage and use 5 years IO, they calculate repayments over 25 remaining years

    Using those 3 points above, and looking at an example of a person borrowing 500K via a 30 year loan, with 5 years IO, at a rate of 3%, it will "actually" cost them $1250 per month ( 15K per annum) out of their pocket for the first 5 years, and when their loan reverts to 3% P&I 5 years later they will "actually" pay $2372 per month ( $28,464 per annum ) - this represents an almost 90% increase in their repoayments, and its all prinicipal so attracts no neg gearing. They have to fund it all out of their own pocket.. But a servicing calculator will "deem" them to be paying 5.5% P&I over 25 years ( not 3% ) , which is $3070 per month ( $36,840 per annum) It gets far worse on a servicing calculator if the investor uses 10 years IO

    So working with 5 years IO as the example, you'd need to be generating $46,050 rent per annum from your 500K , and for your bank to accept 80% of that rental income amount , just to be breaking even on a servicing calculator. If your lender accepts only 70% of the rental income, which is becoming more and more common with lenders, you'd need to be generating $52,630 in annual rental income just to break even on a calculator. Your hip pocket would be way ahead, convincing you that you can afford to take on many more of these properties using the same approach, but you'd only be breaking even on a servicing calculator...meaning computer says no

    And there is another thing; Generating $46,050, which is pretty much a 9.2% yield on 500K, or $52,630 which is a 10.52% yield on $500,000... well, besides the fact its pretty much impossible to find in resi property, there's also the fact that most banks cap acceptable rental yield at 6%

    So as I said... simple answer to your question = NO.

    But you "may" be able to get a little further using one or two non bank lenders who have more generous calculators ... but you'd still need incredible yields and you'd have to be willing to pay a premium to access their calcs, and you'd have to understand they have a limit on what they will expose themselves to with any one borrower...

    So if you want to be fair dinkum about things, you'd have to accept that its pretty well impossible to do what you are asking.... unless you can find properties with yields no one else has ever been able to find :) This used to be much easier when banks did not assess loans at either a 2.5% loading or at P&I remaining term , and when rates were much higher ( ironically) because each time rates fell your borrowing capacity got a massive uplift using "actuals" You'd still need good yields, but nothing like 9-10% . It just doesn't work that way anymore. Same for equity.... its pretty much useless without the borrowing capacity to unlock it/harvest it, unless you intend to sell, buy, sell, buy, sell, buy etc and hope to kick goals each time until you've made enough to get where you are going. But 30 years of incredible growth didnt get many people there, so good luck with that in a tighter post APRA, virus affected era.

    And thats why good quality cash cows that can assist you to reduce debt , are so important in any new portfolio mix these days, especially if you want to grow it. debt reduction is simply VITAL. Anyone telling you otherwise either made their money before APRA, when old models were effective , has a tiny/modest portfolio but think they have a big portfolio so know what they are talking about but really do not ( that covers a good number of people who will offer you their opinions here - make no mistake ) or is talking out of their you know what
     
    Last edited: 28th Mar, 2020
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  6. CamH122333

    CamH122333 Member

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    Thank you very much for your detailed response,
    So for a young investor starting out a capital growth property would be a better option to start then cash cows next to pay down the debt ?
    I’m still in education phase I only have a PPR and am half way threw Steve McKnights course.
     
  7. euro73

    euro73 Well-Known Member Business Member

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    Many people will tell you that a more traditional approach - which involves focusing on growth , then harvesting the growth to grow - is the way to go. They will tell you how this approach is the key to the unlocking the wealth kingdom... except, well... it hardly ever opens the locks. Very few have been able to turn it into an adequate retirement income, in spite of all the advantages that 30 years of the greatest economic growth, wage growth, capital growth and lending expansion in Australia's history have offered them.

    For most investors, all of the advantages of the last 30 years has instead delivered a lot of debt producing inadequate yields that are barely able to service the debt under anything but IO terms. There is no evidence whatsoever that the result of 30 years of this focus on growth has produced a generation of financially free, financially independent retirees. And there should be a lot of evidence by now if growth is the key to that outcome, no? Sadly, at best, a very small percentage have succeeded. And always remember ....that outcome was achieved when investors could borrow 12-15 x income, which seems a long time ago now....before the 2015/16 APRA changes.

    Almost without exception, what the pro growth/anti yield brigade wont tell you is that the rules for borrowing money, which changed significantly for investors around 2015/16, mean that you can only borrow 6, 7 ...maybe 8 x income now , so it is mathematically impossible to match the achievements of previous generations, let alone outperform them. old rules = 12-15 x income new rules = 6-7 x income. Combined with rates that cannot go any lower to create extra capacity, and wage growth that is going nowhere, and now an economic calamity that will see years of recovery required... do the maths.

    But even if you set aside Covid 19, the borrowing rules are really the key to understanding things. As I have outlined above, under the regulatory regime we now live with, without a deliberate and strategic effort to manage your cash flow , debt reduction and future borrowing capacity, lender servicing policies/ calculators offer little to no prospect of allowing you to buy then hold then grow a portfolio - unless you have an income that allows you to achieve what you want to without having to consider borrowing capacity at all... That excludes most mere mortals though. The facts are there for anyone who wishes to embrace them, supported by 30 years of evidence. I'm not sure why the myth continues to be supported, but it has a strong hold of most investors mindsets, which is why most of them will end up with modest outcomes. It takes an independent thinker to look at the numbers, do the maths , ignore the herd and go about things the better way :)
     
    Last edited: 12th Apr, 2020
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  8. Lindsay_W

    Lindsay_W Well-Known Member

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    Simple answer is no you cannot, you will hit a serviceability wall that will mean you can no longer borrow more.
    What course are you doing by Steve Mcknight?
    Didn't you sign up for Dymphna Boholt's course?
     
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  9. My House QLD

    My House QLD Well-Known Member Business Member

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    Apples and Oranges. Townhouses are generally not a great investment in Logan or Moreton Bay. Did you use a BA for the Slacks Creek townhouse purchase?
     
    Last edited: 12th Apr, 2020
  10. Omnidragon

    Omnidragon Well-Known Member

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    In the last 10-15 years the ones who’ve made millions have probably all done it via cap growth. If there’s one thing I didn’t do well in properties was not buy enough cap growth stuff over cashflow stuff. Whether you can repeat that forward I don’t know - but if it was purely for cashflow I probably would scale back any further interest in property very quickly.
     
  11. Trainee

    Trainee Well-Known Member

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    you could just sell something that had a lot of capital growth if you want to pay down debt in the future.

    due to serviceability walls, you want the max bang for your buck. That usually means you want capital gains.
     
  12. euro73

    euro73 Well-Known Member Business Member

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    That's assuming the type of growth that has occurred in the past, continues. That requires expansions to everyone's borrowing capacity. Rising tides and all that kind of thing... Where will that come from? With DTI ratios of 6-7 x income in place across most lenders, rates pretty much as low as they can go, wage growth already non existent pre virus, and likely to be worse post virus, that's a pretty risky assumption to base a portfolio building strategy on these days.... Then you factor in sensitised assessment rates, living expense scrutiny etc.... hard to support big growth following the same trajectories it has previously.... When there's an alternative ( cash flow and debt reduction) better suited to the new credit environment, allowing the pursuit of a very simple, safe and easy strategy that outperforms what most growth investors have achieved over 30 years of easy credit, in half the time.... that is difficult to ignore
     
    Last edited: 27th Apr, 2020
  13. Sydney Villain

    Sydney Villain Member

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    Was this at Samanthas Way by any chance? Seen a heap of complexes around this area but Samanthas is one of the best managed