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Post-APRA - is it possible to start building a sizeable portfolio on a PAYG salary?

Discussion in 'Property Finance' started by Taku Ekanayake, 18th Jun, 2016.

  1. Taku Ekanayake

    Taku Ekanayake Well-Known Member

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    Hi guys,

    In this new era of lending, where servicing has been squeezed for most - is it possible to start building a sizeable portfolio on a PAYG salary?

    If you were to start building a property portfolio from scratch today, and you had a goal of buying 50 properties, could this be done on a PAYG salary with these current APRA restrictions in place. Let's say a PAYG salary is capped at $220K/per annum (I used this figure because $220K would get you into the Top 1% of income earners in Oz).

    Or might I have to start my own business which has an income way in excess of $220K?
    • PAYG salary of $220K/per annum.
    • Holding no liabilities (CC's, PPOR, or other debt, etc).
    • Single and no dependants
    • Each IP is worth $300K at time of purchase at 80% LVR.
    • Loan on each property is $240K.
    • $240K x 50 IPs = $12M debt
    • Interest rate (5.5%) across $12M = $660K/year
    • Rental income (6% yield) across $15M portfolio = $900K/year
    Any ideas or indication if this can be achieved?

    Thank you in advance for all your comments.


    Cheers,
    Taku
     
  2. Peter_Tersteeg

    Peter_Tersteeg Finance broker and strategist Business Member

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    Given enough time, yes it can be achieved (don't ask how much time, I can't predict the future).

    If you believe you can start your own business tomorrow and very quickly be earning $220k a year, your best strategy would be to focus on that business to achieve $900k in income, rather than IPs.
     
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  3. Barny

    Barny Well-Known Member

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    @euro73,^^^^ can it be done at 220k?
     
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  4. Daniel007

    Daniel007 Well-Known Member

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    Could you look at developing to supercharge returns, instead of just a buy, reno, hold strategy?
     
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  5. Ace in the Hole

    Ace in the Hole Well-Known Member Premium Member

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    Maybe you could, but it may take you a working lifetime to do it, as they time required to earn the limited salary is the biggest restriction here.
    That would be doing it the hard way to achieve that result.
     
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  6. euro73

    euro73 Well-Known Member Business Member

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    • In my view, it can't be done with this scenario.

      Start with the broad brushstrokes. You need 315K each time you buy a 300K property to allow for stamps and legals. And that also means that if you want 240K (80%) lending each time, you need to do equity pulls of 75K each time you purchase, as well. 75K is 25% uplift per 300K property.

      So OK, lets say that's all possible because every one of the properties show that sort of uplift, and not only that, they show the uplift fast enough so that you can keep harvesting that 75K regularly enough so that you can move on to the next purchase quickly and this approach doesnt take 20 or 30 years. I have run a hypothetical with a lender that takes "actuals" and I have done it for 30 properties, rather than 50.

      Here are the figures I have used. 220K salary. 0 dependents, personal loans, car loans, ppor debt , credit cards.

      Let's fast forward and say you already had 29 purchases done, and were trying for a 30th. Let's also say you had borrowed 315K each time to close each of the 29 previous deals. Let's also say you had a clever broker who'd extracted all available capacity from CBA, ANZ, NAB, Macquarie, Westpac, STG, AMP, etc etc etc... just to get you this far.

      So here we are. You've borrowed 75K from equity, and you're asking for a 240K to complete the 30th purchase.

      Assuming you used 75K cash for the 1st purchase and only borrowed 240K for the 1st purchase, then effectively borrowed 315K for the next 28 purchases, and have just pulled 75K more equity out to fund this deposit and stamps, you already have $9,135,000 I/O debt.

      So your total end debt is going to be @ 9.375 Million.

      At the 5.5.% I/O rate you have suggested, the $9.135 Million of existing debt would be assessed as costing you $502,425 per annum in "actual" repayments, or $41,868.75 per month

      If you achieve 6% rental yields as suggested, that 18K per annum x 30 properties = 540K per annum, or 45K per month

      Result? Doesnt service .

      Now, at rates of 4% I/O and using a lender that takes "actuals" , I can make it work for you ...just . So I guess in theory at least, we can demonstrate that 30 x 300K properties is possible, at 4% I/O rates, "actuals" and 220K of income and 6% rental yields. But you'd need to have impeccable, mistake free lending done in the right order, and really fast, and be able to harvest equity whenever you need, hope rates never go above 4% and that more than 1 lender can offer "actuals" .... otherwise this would take a looooooooong time.

      But to your original question - a $15 million portfolio - ie 50 x 300K properties, even when using "actuals" and a rate of 4% rather than 5.5%, and even when achieving 6% yields... nope, that isnt going to fly Im afraid.

    Reduce a bunch of debt as you go though, and you'll be able to do better than 30 properties valued at 300K each. Imagine half of these (15) were NRAS for example, or high yielding dual occupancy for example, and they were generating an additional 9-10K each in surplus cash flow, or 135-150K per annum.... and you then paid that onto the loans. You'd be paying off one of the loans every 2 years or so, but retaining the rental income from that property, then re- borrowing and replacing the repaid debt with new debt, but adding an additional rental income. So your debt position would not be changing , but your rental income position would be improving.

    Or, take a lateral approach. Pay off none of the debt, and instead use the cash to buy 1 new property every 2 years or so... you'd be taking on no new debt but you'd be adding additional rental income. Same Same.

    Result = far greater servicing capacity, and a far larger portfolio if you wished to go that way. Or, pay off debt faster and be left with a better passive income, if you chose to go that way.
     
    Last edited: 18th Jun, 2016
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  7. wombat777

    wombat777 Well-Known Member Premium Member

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    Agree that this strategy is a possible approach. I am in a position where my serviceability is hindered by my PPOR debt and thinking that developing may be a way to achieve bursts of profit to lift overall portfolio equity instead of a straight buy+hold strategy. This is all dependent on being able to finance construction.

    Would become a buy+develop+sellsome/holdsome strategy.
     
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  8. MyPropertyPro

    MyPropertyPro SE Qld Property Management & Investor Services Business Member

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    Great analysis but just with the 6% yield section above, it's probably more realistic to assume that the 29 properties were bought over a period of years where by the 30th purchase the yields on original purchase price were significantly more. Assuming for example 2 purchases per year and allowing for a 3% p.a. compounding increasing in rent on the first property alone, by the 15th year (purchasing the 30th property) the yield on the original purchase would be about 9.4% (about $28k p.a.). Would this change the calculations? Quite hard to work out I would think as we'd have to compound each property by a reducing amount of years to the 15th year! I guess the other consideration is that price of properties are also going up over that 15 years which may be what you were working on?
     
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  9. ellejay

    ellejay Well-Known Member

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    I've got nowhere near 50 ips but I've found, even though mine are all managed by PMs, the business of dealing with queries from PMs, keeping on top of PMs, keeping up to date with markets, tax stuff, finance applications, buying, selling has made it hard do justice to a senior job. I'm often on the phone/email, distracted by property stuff. I can't imagine juggling 40 odd ips with a $200k pa job where you're expected to put in all the hours, and carry quite high levels of responsibility and risk.

    Also don't forget that rental income can vary significantly month on month. I've had every cost imaginable across my portfolio over the last couple of months. Wouldn't help if you were needing some cash or trying to demonstrate cash flow for the next purchase.
     
    Last edited: 18th Jun, 2016
  10. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    My view is that it is extremely unlikely to be able to be done.

    Even getting 10 of those properties will be a challenge.
     
  11. euro73

    euro73 Well-Known Member Business Member

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    Sure..it definitely would. Of course. No doubt.

    But lets not forget, 15 -20 years from now, the debt will be assessed over 15 years at P&I... one thing counters the other ...

    Anticipating income, servicing rates, lender policies, etc- 20 years out... waste of all our time.

    I did the exercise to demonstrate that it would either take a long long long looooooong time, or require aggressive and lateral thinking and a lot of luck, to do it sooner.
     
    Last edited: 18th Jun, 2016
  12. York

    York Finance Broker Business Member

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    Agree with what you're saying. It is difficult to juggle the day to day stuff. But, it should be known there is at least one vocal member on this forum with over 30 properties who juggles the property stuff with a very high paying job. So it is possible for someone who is focused and passionate about it. I'll also add that recently he has been going directly to lenders for the last few purchases as opposed to getting a broker run around for him. Meaning he is spending even more of his time on it and still doing well from it.
     
  13. euro73

    euro73 Well-Known Member Business Member

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    Yep... I made some big concessions in the assumptions when I did that modelling - such as the very rapid 25% equity uplift ...
     
  14. ellejay

    ellejay Well-Known Member

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    If you're talking about @Sea Change it'd be interesting to hear how he fits it around work. Not saying it can't be done but you need some flexibility to be able to duck out of work if needed. I think Cliff may have said his wife helps with some bits? I do it on my own, so depends on your situation.
     
  15. York

    York Finance Broker Business Member

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    Yes, everyone's situation plays a big part. No, it's not Cliff.
     
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  16. Sonamic

    Sonamic Well-Known Member

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    Not quite rasta enough.
     
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  17. Taku Ekanayake

    Taku Ekanayake Well-Known Member

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    Thanks for taking the time to write a analysis on this @euro73. Yep, no doubt there would be plenty of variables and fluctuations as market changes and lending changes. I wanted to keep it basic to get a feel.

    Do you think APRA will eventually relax their current limitations?
     
  18. ellejay

    ellejay Well-Known Member

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    Gotcha!
     
  19. Taku Ekanayake

    Taku Ekanayake Well-Known Member

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    Hi @ellejay,
    thanks for your comments. Yep, I don't imaging it would be easy at all and there's so many unexpected things that come up. If I was to have that many properties, I would look to have a few apartment blocks like these in the portfolio to make thinks a little more manageable:
    17 Templeman Crescent Hillsdale NSW 2036 - Apartment for Sale #122207714 - realestate.com.au
     
  20. euro73

    euro73 Well-Known Member Business Member

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    Its not just APRA. It's also ASIC. And there is more to come by 2018. It's impossible to know what the regulators may or may not do , but all their commentary to date indicates this is going to be with us for some time yet.
     
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