Starting investment Strategy Structure Advice

Hi Guys,

Just joined this forum this is my first post hope to get some help for my new adventure

Advice sought from forum elders/successful/experienced investors on strategy Re:
10-year plan. Good with numbers little knowledge in finance and investment.


Goal: Build an investment property portfolio base on capital growth in the next 10 years to generate passive income using our Equity and other assets.

• Currently Late 40s self-employed IT, married with kids Aiming for growing passive income.
• PPRO: Value 1.8m-1.9m LVR 25%
• Loan -$450k (IO Just finished)
• Repayments $4,577 pm P&I VAR 3.6% all incomes in offset account
• Equity: $1.4m
• Wife income 40k pa
• My Company net profit after Tax for 2018/19 is 240k (Depends which year we get big job, normally 50k-80k but increasing)
• Join Super 100k currently.
• PPRO CG Increase 5 years 600K
• Pre-Approved Loan, see below info, based on the my assets income above is that a good deal or I should go somewhere else to get a better deal?

Pre-Approved loan $1,344,000 80% (bank valuation 1.7m)

Owner occupied - 360k P&I @ 3.14%

Owner occupied - 984k IO @ 3.85%

+

Investment Loan - $2,120,000 80% IO @ 3.80%


Current personal thoughts re 10-year plan:

• Sell PPRO and Upgrade to bigger/newer PPRO same area (2.2-2.5m)
• if possible, keep existing PPRO as investment property has good CG for (not sure how to do it in terms of interest/TAX)
• OR Keep PPRO and buy IP
• buy 1-2 IP to start with in the same area if possible
• IP Buy Hold Rent for next 10 years or
• IP Buy Renovate Sell
• Build investment property portfolio using equity available in current properties.

PPRO Loan Structure P&I (base 5-10 year plan)

• Personal Name or Trust?
• Register on both name or separate?
• LOC?
• Offset?
• Any other suggestions

IP Loan Structure IO (base 5-10 year plan)

• Personal Name or Trust?
• Register on both name or separate?
• LOC?
• Offset?
• Any other suggestions

Any ideas/thoughts welcomed?

 

Hi and welcome! There is abit of a disconnect here - you say you're investing for capital growth over 10 years, but want passive income...

The two don't tend to go hand in hand, especially over only 10 years.

You'd have to be quite actively investing and focusing on manufacturing growth from high cashflow properties for this to work...

And you'd need to be reducing debt aggressively to have decent cashflow after 10 years.

It can certainly be done but you need to think specifically about what each property is going to achieve for you and how you're going to achieve that cashflow - by selling,and paying tax and buying cashflow (shares etc) or paying down debt.

 

Hi Jess, thank you for the advice, what i mean for example if IP CG in a year was +100k can i use/withdraw 25k for private and the rest keep for negative gear IP if require. is this possible?

Thank you

 

Get some legal advice on the use of trusts, but generally if you own the property you would borrow and onlend to the trustee - if using a trust to invest.

Capital growth can provide good cash flow too, by selling. I'd rather get capital growth from property than cash flow as that is what would make you rich. capital gains also get a 50% discount which income doesn't.

Never allow your trading company to give a personal guarantee - some lenders may ask for it.

 

You can split loans and use them as you wish as long as you keep them separate.
However, isn't your strategy for long term to build up an asset base?
10 years IMHO isn't long enough to live off equity or selling or whatever you decide.
I myself had a plan for around 30 years or so, where the first 10 years was aggressive buying and accumulating (higher risk as higher debt exposure), next 10 years tweaking strategy getting rid of lemons, investing in few premium IPs, adding renos, land banking some, etc...), the next 10 years just letting time do its thing (having an exit strategy, no longer accumulating, generating alternative incomes). So far I am in my 20 year journey and somehow it worked out very well, but it requires discipline, consistency, and perseverance.
There are many ways to invest into RE, and upgrading your PPOR to better location with reno potential is just one way, my approach was for CG but playing Monopoly in real life (buying few medium priced IPs at various locations - but not the cheapest not the dearest, then a premium one - better location more expensive premium IP, and so on - like in Monopoly when you have few houses then eventually you can then put a hotel on it).
Spouse was around your age when we stared I was younger but it is still possible to do what we did. I think you need to define the end game from your strategy (I think that's what's lacking, what do you wish in $ terms, your investments to produce for you, then work out from there what asset base you need first to accumulate and what RE investing you will use - as you say buying IPs or upgrading PPOR?).
Only you can answer those questions for yourself, the most important thing is to act.

 

You can borrow against the growth for sure - but living off equity isn't as easy as it used to be...especially long term.

Using the funds to pay for the negative CF on your IP's can be done, but bear in mind there's tax implications and you can't use a loan to pay your interest cost...or you can, but it's generally not deductible...so you end up with a negative compound interest monster...not my idea of a fun time.

I know there's lots of books around that promote these strategies, but they're outdated and out of touch with the reality of today's lending environment.

 

Thanks @Terry_w

Do you mean keep buying and selling the IP, can you give me an example?

Thank you

 

Say your borrowing capacity is limited to 4 properties. One way to get ahead is to buy 4 and then sell the first one you bought after a certain amount of growth has happened. You pay CGT, gettting a 50% discount and using minisation strategies, then have a lump sum. You can then use this to pay down non-deductible debt then deductible. Keep doing this and you will end up with 5 properties and then 6 etc.

You can also recycle loans. Sell one property yet keep the loan open so you can use it to buy the replacement property and use the profits to keep funding living expenses in part of full - depending. THis can be done without needing to requalify for the loan.

 

Thanks @MWI

Your story and journey is inspiring thank you for taking the time and sharing it.

I'm trying understand the financial part of the GC approach, when you purchase your first investment what structure did you setup for the PPRO & IP, i.e each loan on personal name or trust? did you use LOC, offset account? Did the loan Setup/structure changed or was the same as you kept buying more IP? how did you managed your cash flow between the IPs, did you use LOC to compensate between negative and positive IPs? and did you use any funds from the CG for privet expenses or never touched it?

Agree i'm working on my plan as well.

Thank you

 

Ok 20 years ago no offsets existed plus I was very naive and did not know much at all, all I understood was the concept of starting with one IP, when equity grew or we saved up 25% (20% for deposit and 5% for costs) we would duplicate, to invest elsewhere not just next door to where we live.
Our PPOR was paid off we did this in 5 years in 16.5% interest rate times! I was obsessed in trying to pay off our PPOR as soon as we could but we lived south west so not in premium suburb in NSW at all. But decided not to go ahead and move to new suburb and build our mansion of 700sqm on 2 hectares, instead read few books and decided we need cash flow when older not just have all money allocated in PPOR (just our choice), so invested into IPs instead.
So at first we were passive investors (followed someone else system) you can read my interview posted quite few years back:
The MIW Interview
We invested in our joint names at first, now we do in trusts, in IO loans, to date I do not have P&I loan yet? Now we do have offsets, LOC against our business, all separate stand alone loans (no cross-collaterised).
We bought only when we saved up another 25% so we did it the hard way as I needed to sleep at nights, so the hard way. We duplicated when we could not every year but when time and markets dictated that with our risk profile. Over the years became more active, added renovation or land banking to RE investing.
We invested elsewhere too, other businesses, stocks, private IPOs, collectibles, SMSF, etc...
over the years structure changed to trusts, managed cash flow with buffers as always had some equity and we duplicated with own funds rather than drawing it down. Only in the last 5 years drew down against paid off PPOR for further investment.
To date still accumulate have not withdrawn any for private use, as we have created other sources of income too, prefer to land bank some for further redevelopment (or for resale to developer).
Spouse can access SMSF late this year if required, myself will need to wait 6-10 years so now we are into the third stage of 30 years where we plan the exit strategy instead.
The wonderful thing about taking the initiative early on was that now we have choices and buffers and alternative passive incomes, so if one dries up you have others coming in.
After few years when IPs CG grew even withdrew the title of one IP without paying it off as was able to give other one IP as security against those two loans.
By the way I have large $ buffers now but never had to use them as I think we were low risk investors.
The difference was in discipline, in consistency and perseverance of following our strategy, basically always buying when finances permitted rather than what 'noise' or what else was happening elsewhere!

 

Hi @Terry_w,

First off- Thanks for all the great information you provide on this forum! Im a first time poster but have been reading a lot of your stuff lately.

You often mention getting legal advise to discuss how to set up a trust,or if one is even required. Wondering if there are any lawyers in Melbourne that you would recommend to discuss this with? Or are you currently taking on any new clients? If so, what is the best way to contact you?

Thanks

 

For your hotel is it in the lease they have to refurbish a number of rooms a year or within the lease period?

 

My contsct details are in my signature.

 

You are funny!
No, what I mean by that we buy in premium suburb, premium place, premium street, even did premium renovation (ourselves!). You can do that once you have quite few houses you can then invest into a hotel, right?

 

Haha I thought you said you put a hotel on one of your sites {quote} " eventually you can then put a hotel on it"

 

I wish, I meant in terms of context as you play Monopoly, not literally, meaning a more premium investment!
Although own a block on units on one site, if zoning permitted kids may do that in some future date or someone else may (like on sell to developer for many more unit redevelopment?). Instead better to redevelop to many more units I think (hence a hotel - in a different way of thinking!).
Also next door to another one we own has been doing similar thing, is in process of redevelopment, old post office to ground floor commercial unit with 14 units on top in nice lifestyle Sydney suburb (oh and 30-40 garages below). Taking already 3 years to build but slowly progressing ahead!

 

Hi Guys, thank you all for the reply, i have been busy and managed to read "7 steps to wealth" great book.

Before i can start building my portfolio we need to upgrade our PPRO i was thinking that our current PPRO would be a great Premium IP (tick all the boxes, have results/facts, no emotional strictly business) and we should keep it as it will be a big mistake to sell it, as john Fitzgerald said "the biggest mistake you’ll ever make in real estate is selling land". i was doing the numbers and can see clearly that the key is to transfer/ unlock the Equity to the new PPRO. That will reduce the loan/interest amount, with all the benefits that come with IP, and save time to find the same IP, two bird at the same time..etc. i read here that its difficult and costly. so the question is how to transform my PPRO to IP so i can transfer the Equity to the new PPRO, is there any creative way to do it?

Thank you

 

This might be of interest
Strategy: 11 Strategies for when you move out of the PPOR and keep it Strategy: 11 Strategies for when you move out of the PPOR and keep it

 

Thanks @Terry_w

Very interesting, have you used those Strategies for your clients, especially 3, 4, 5 & 6 ? i'm looking for property investment expert or property accountant that is upto-date and know his way around, can solve complex situation(as above) to help out with it all that initial setup process, is that what you do or can help with part of it?

 

Yes I have advised on all of those strategies. But I am not a property investment expert or an accountant.