Strategy Game: How would you start your property portfolio if you had $1.5 Million?

Long story short, I Like to see a split of approx. 30/30/30 renters, owners/mortgage holders. If owners and mortgage holders are a little more than renters then I like that too.

With regards to BMV deals, again long story short, 1, know the values very well of the areas you are looking at, 2. buy at an advantageous part of a cycle, 3. Network with agents closely on the ground. 4. Learn good negotiation skills/tactics (yes they do exist imo). 5. Understand that price and VALUE are 2 very different things imo. I always look for value.

 

so you buy a 500K (first home) property to live in, you buy your 1 Million future home right now as well, rent it out. You sell your 500K home lets say in 5 years time CGT free, move into the 1 Million home for the rest of your life.

 

Yes and claim all associated costs on the $1mil house up to the point you move in. (but keep recording all associated costs while living there just in case you change your mind and sell)

 

Great strategy Terry.

 

PPOR - NO LOAN

I'd buy the PPOR with cash. Lets say you spend 500K on that. You need to allow for stamp duty and legals... so you might use @ 520K. You now own your home. No more rental expenses. Just groceries and bills. Whatever else happens you'd have a roof over your head , your wifes head and your kids heads for life. This is a no brainer.

Then , with the 980K you have left, the worlds your oyster - to a point. Borrowing capacity is still going to be quite limited.

INV #1 - NO LOAN. BUY IN WIFE'S NAME

I'd buy a dual occ using cash. That's going to eat up @ 560-580K . Its going to generate @ 650-660 per week in rental income, for a total gross income of @ 34K. You can offset that with @ 6K of expenses and @ 16K of depreciation , so the net pre tax income will be @ 28K and the taxable income will be @ 12K. Put this in your wifes name or in a trust so the income can be distributed to her - her tax free threshold is $18.2K and the taxable income ( after deducting expenses and depreciation) falls below that - so the entire 28K of net pre tax income could be paid to her tax free.

Now you would have an unencumbered PPOR and an unencumbered INV property generating 28K net income per year., and 400K cash.

INV #2 - LOAN . 99/1 ownership.

This is where you would need to borrow money to keep going. Your gross salary is 50K, and the other income source would be rent. The bank will take 80% of the 34K gross income from INV Property 1 ( which you already own outright ) and 80% of the 34K gross income from Property 2 ( which you are buying ) so they will take 54.4K as rental income for servicing. With no PPOR mortgage and no rent to pay, 54.4K of rental income and 50K Gross income from salary, this should enable you to borrow for another dual occ fairly easily. I would borrow 80% . I would contribute 20% (112-116K) + stamp duty (4.5K) towards the purchase - ie @ 116.5-120.5K.

I'd set that loan up P&I from Day 1, so the property ran @ CF neutral /slightly positive before tax, and @ 5K CF+ after applying depreciation . I'd set this one up 99/1 in your name, so that 99% of the deductions from depreciation would be offset against your taxable income of 50K . Your wifes income is already tax free so there is no point allocating anymore than 1% to her.

The end result would be that you'd own an unencumbered PPOR, 1 x unencumbered INV property generating 28K to your wife tax free, and a 2nd INV property generating @ 5K CF+ after tax to you. You'd have cash reserves of @ 280K and a debt of 484K.

INV #3 - LOAN . 99/1 ownership.

If borrowing capacity allowed for you to get into a 3rd dual occ , I'd do so. Again, using 20% ( if possible) and borrowing 484K ( 80% of 580K) and setting the loan up 99/1 and P&I from day 1, this would take you to a position where you had an unencumbered PPOR, 1 x unencumbered INV property generating 28K to your wife tax free, and a 2nd INV property running at @ 5K CF+ after tax, and a 3rd INV property running at @ 5K CF+ after tax. You' d have cash reserves of @ 160K and a debt of 968K, which would all be P&I from Day 1

Income

At this stage, your wife's 28K is basically tax free - as explained above. Confirm this with an accountant of course....

Your 50K salary would be offset by @ 16K of depreciation from INV # 2 and another 16K of depreciation from INV #3, reducing it to @ 18K taxable, meaning you would be paying little or no tax. Again, confirm this with an accountant ...

But assuming Im right, you'd be earning @ 50K net and your wife would be receiving @ 28K net. thats nearly 80K of net income per annum. Right now you are earning 50K and its taxable.

You'd have 968K of debt - which you could immediately reduce to 808K debt by repaying the 160K of cash that you still have left over ... or you could park it in an offset and retain access to the cash. Either way, with an outstanding loan balance of 808K set to P&I from Day 1, and using wifeys 28K to make extra repayments towards the debt, you could pay off #3 and #4 in less than 15 years - see below

Then you'd be left with an unencumbered PPOR and 3 unencumbered INV properties, which in 15 years time should be generating 45K each Gross .( that's based on rents increasing just 50% in 15 years - pretty conservative stuff) Beat that outcome !!!!

The other beauty of this is that the effects on land tax. Because the dual occs are regional, the land component is inexpensive. 4 of these properties with land values of 165-180K each would mean a combined land value of 660- 720K. The NSW theshold sits at 629K this year..... so you'd only have a liability fof between 31K - 91K, which would mean @ $600 - $1550 land tax bill.

Basically that would be your only tax liability whatsoever.


People have been faffing around trying to get to 6 figure passive incomes for over 30 yars using property - and thats when borrowing capacity was unbelievable generous. I just outlined you how to do it easily in 15 years, using extremely conservative estimates

So yeah, thats what I'd do. PPOR owned outright. 135K passive income from rents within 15 years - but probably a bit more as Ive been very conservative with the rental inflation ......... absolute no brainer

 

very cool stuff, good thought process! I like it! Thank you for taking the time in contributing. So you are all for Dual Occupancy? Granny Flats, dual house on one title, that sort of stuff?

 

Yes sir...its what I do.

Dividend Reinvestment using property , instead of shares....

Purchase assets that produce a dividend. reinvest it in debt reduction.

I can use much more leverage that I can use for shares, and its not at call. So I can grow a much bigger asset base and a much larger income stream - even with zero growth ( if things went that way ) Simple as that

 

@euro73 Great post. When you say dual occs, granny flats, etc how does your strategy work? I am assuming you buy a property that has the potential to do dual occ or granny flat and you develop the property (put in granny flat) in order to maximise income, reduce debts, etc, etc. Is that how you do it? Or do you buy dual occs (as an example) already built?

 

@euro73 has explained it before, search it.

 

Hi

(and welcome I've seen a few posts from you this week but haven't had a chance to reply and say hi!!)

A lot of this crystal ball depends if you can sell the European dwellings. If you can't sell them then I'm not sure an Aussie bank will allow you to use the foreign income towards servicing but I'm not a broker.

Firstly I would take a good look at your current situation and what sort of risk appetite you and your wife have. This is core to your chosen strategy. Some people aren't cut out for higher risk strategies.

Then I would look and assess what skills you have and time to put towards meeting the strategy. If you have some DIY skills then you might lean towards buying a PPOR that is a renovation project and doing it up and selling CGT free. You could do this a few times every 2-3yrs

If you have no skills and no time then you will need assistance on board if you want to go into the riskier areas like developing. You can start with a simple retain and build behind with what you can borrow plus the $500k

 

Yes. Here are some examples of what I sell ( and I own one in my SMSF as well)

14 McCarron place, ORANGE, 2800, New South Wales

14a McCarron Place, ORANGE, 2800, New South Wales

1 Young Street, ORANGE, 2800, New South Wales

1a Young Street, ORANGE, 2800, New South Wales

7 Andres Street, Orange

7a Andres Street, Orange

 

@euro73 Many thanks for the response. Really appreciate it. Nice properties. Are these ones you have built/developed? Sorry for all the questions. Have read much of your terrific material on this site but obviously not all of it. Like your approach.

 

While at your income level marginal income tax rate may not be a big concern, it's not pleasant to hand over almost 50% of every additional dollar you make to government once your taxable income goes up. So tax planning is also should be taken into account. I'm a big fan of tax advantaged accounts, I have accumulated very nice balance in US Roth & Traditional IRAs and I'm maxing out mine & wife's super too, both concessional & non-concessional caps since I moved to AU.

If you go SMSF route and put yours and wife's super and max out non-concessional cap (300k per individual, bringing forward additional 2 years cap) then you will have 2 x 300k in tax advantaged accounts that if you buy property with all CG and rental income is not subject to income tax.

 

Nice properties, thank you for sharing. I very much like the idea of dual, as it can help you take the property to cash flow neutral or positive event. Personally, I would try to find a used property with dual on it already or something that can be converted into a dual, or something that has a good granny flat. Reason being that land value increases but the building value decreases over time. Yes, you can depreciate the new building, but the opportunity cost of not buying more land is greater. IMHO if you can get as close to land value as possible, it's the way to go. Hard to find a good land value dual property though. Probably looking in bluechip suburbs where even a nice house is at land value. What I see in Perth is that the more expensive suburbs you go to the less and less the actual house is worth, even nice houses. You do need to be careful though, as any unused land in an investment portfolio is basically wasted opportunity. So if the property comes with a large backyard you would want to develop it, but if it's in a bluechip area, and you are buying the old house part of a subdivision at land value, I think you are winning. Especially if it can be converted into a dual occupancy. Let's say you buy an old 4x2 near a uni in a bluechip area and convert it into two 2x1's for students. - THIS IS ALL THEORY GUYS!! I haven't done this. I am just thinking out loud. Could be all wrong about it.

 

I sell these @Harry30 . I have been working with this builder/developer for a number of years. We did some NRAS houses and townhouses together, and now we are doing dual occ's together.

We offer these in Orange, Bathurst on occasion, and possibly soon in Dubbo.

They are 4 bedroom homes and 1 bedroom granny flats, on a single title. Valuations on completion are coming in 40,50,60K above purchase price.

Rents are achieving $ 650 - $665 per week

Here are a some floor plans FYI.

This one is a corner lot





This one is a different corner lot

 

slightly narrow regular lot with dwellings attached

 

regular lot - detached . This is the most common layout we offer .

 

They generate 2 independent rental incomes, are on a single title and banks like them just fine.

These are the types of investment/ income producing /cash cows I was referring to when I suggested the OP consider accumulating using @ 1 Million of the 1.5 Million to set themselves up for life over 15 years

 

You certainly have many options with 1.5 Million at your disposal. What I have outlined is just one option to consider. I would only point out its essentially mistake proof, zero growth proof, set and forget... and it will set you up for life without having to take on the complexities of trying to become a mini developer.... you dont have any experience in these areas and while you do have cash, you dont have much borrowing power if you need it for the kinds of things you are suggesting...... just be careful you don't bite off more than you can chew. sometimes simple and safe and effective is best. It just works.