Strategy: Consider multiple cheaper Properties

2 million in loans.. you must need an amazing income for that! I've already run out of serviceability with 2 cheapies heh

 

@Beano sign me up
we talking commercial now?

 

Many in Sydney. One of my clients just bought a $3.2mil one. Another $2.6mil. Some in Melb too.

 

Right

 

Hello Terry, thank you for the worked examples. Could you clarify why non-working spouse B with $0 taxable income now has $50k taxable income if the $1m is in B's offset account? Are you saying B's income increases by $50k, as her taxable income was only $0 due to prior mortgage interest deductibility (which has been reduced by $50k)?

 

Second question, wouldn't working spouse A's taxable income only increase $25k to $225k? As spouse B's has reduced by $25k from $50k to $25k. Not trying to nit-pick example numbers, just seeing if I has genuinely missed something here. Thanks!

 

Yes ...but looking at PC the best deals have been cf- and the usa ...going forward best dear ????

 

commercial is something that I'm very keen to get in on but would have to build my foundations first. US multi-family is also on the cards potentially later on

 

The yield has been great for commercial but compared to residential but CG has been the poor cousin ...
Going forward i still believe commercial CG will equal residential CG ....as i cannot believe residential can outstrip commercial for ever.

 

Beano - how have the capital gains been with your commercial?

 

Commercial
They have been very poor
Properties I have purchased 18-22 years ago i believe are only double purchase cost
Others about 15 to 13 years ago maybe about 80pc more
The properties now generate a tremendous cashflow (due to lower interest rate) ..
The problem is I (and everyone) can still buy these types of properties for 9 to 10pc net yield.
With the residential the growth of the market value has been the compression of the yield while the growth in the market value of the property is based on the rental growth.
Other properties are in a thinly traded market while a self calculation of the value is hard due to the rentals being reviewed in the 7 to 12 yrs range. Until a formal (expensive) valuation is done
Residential
Like most persons my residential (s) have had great CG but CG on personal principal residence means little personally (high or low it still the same house to live in.
The dozen or so rental residential properties form a portion that is pretty immaterial in the big picture as over 93pc (by income) of the portfolio is commercial

 

Great post @Terry_w, definitely something for me to consider for future investments.

Would the similar pros and cons apply for commercial properties as in resi?

 

The same tax and duty rates apply to commercial as in residential. Sometimes land tax can be passed on to the tenant in full or part though.

 

Buy a 500k crapper in Sydney and wait about 20 years.

 

Thanks for the thought provoking post, Terry. It's been a discussion starter in our household on our investment strategy moving forward. As Sydneysiders, we're definitely seeing quite a number of investors jostling with hopeful homebuyers in the Inner West and East looking at $1.5M - $2M+ terraces at inspections lately.

 

After much thinking, while I largely agree with Terry, I think there are still benefits to going mid-range rather than low - that is buying 4x $500k or 2x$1m.
- going low means picking the market much more carefully, essentially choosing suburbs that will do better than others around them compared to their 10-20yr avg, otherwise there's no reason to choose them! On the other hand, the higher but still middle-of-the-road suburbs will likely keep their longer term higher averages without having to be so careful and choosy. So if you are great at guessing, or believe your choice is more than merely an (well-)educated guess, then going low makes sense.
- the tenants in the midrange are possibly going to be better (debateable!), more highly paid (almost certainly), and keep their jobs in the event of a recession/downturn or local problems like the car plant closing. I would think the low-end is of similar danger to the higher-end of town if push comes to shove.

Unfortunately, all the other points on having multiple cheaper properties are excellent .

 

Keep in mind I wasn't advocating $200k properties but I just chose these numbers to illustrate the 2 extremes - very cheap or very expensive. A middle way approach may be good.

 

Just thought of some more things

Disadvantages

• Smaller loans tend to have higher rates

• More work for the borrower and broker with multiple loan applications

Advantages

• Many lenders base discounts on total aggregated borrowings so maybe no change in rates due to lower loan sizes

• Smaller loans can also be more easily moved to different lenders

• If LMI is to be incured it would be lower on the smaller loan amounts

• LMI serviceability would be much stricter for higher loans

 

TBH, I would prefer 1 x $600K IP with say, consistent yields of 4% and CG of 7% than 2 x $300k IPs with consistent yields of 7% and CG of 4%.

Especially for B&H investors like me because, after 20 years, the gross rents are the same in dollar terms but one ends up with around $1M more equity.

If you extrapolate this to a property portfolio of $6M (that is, 10 x $600k IPs or 20 x $300k), then that is a lot of extra equity. That is, $10M extra equity.

For newbies, 20 years might seem like a long time. Our first IP was bought 25 years - the time has gone so quickly.

 

Me too! Generally

But the higher yielding ones could mean you could borrow more and end up with a larger capital base