Strategy when market is slowing down

Hi all the brilliant PC members,

This is my first post on PC. I have learnt alot from everyone here, and looking for everyone's thoughts/comments to help planning for the next phase of my investment. Any challenge or critiques of my plan would be much appreicated.

So far I had a good run with the property investment journey in this boom cycle. In 2010, we were living in a small townhouse, and bought an apartment in the 400ks range as the first investment property; then in early 2012, bought a run-down house in lower north shore in Sydney, did some simple renovation, and in 2013 added a granny flat to help with cash flow. That house should have double in value. In 2014, we sold both the TH and the apartment at a decent price and bought another super run-down house in lower north shore. In the last two years, we have just finished a major renovation and extension. The gut feeling is that we could make a net gain of 1mil plus from the PPOR as a result of both the rising market and the flip project.

So, at the moment, we got two houses in the lower north shore area. I pretty much got to the maximum of my serviceability with a total loan of about 2mil. LVR isn't the issue, but income is the constraint. There is some investment sitting in my share portfolio which has been doing great, and I have no plan to move that into property investment. If I liquidate all the shares, I can potentially pay off my PPOR. The investment house is cash flow positive at the moment, but not much.

My PPOR is of a higher value compared with the investment house, and we plan to hold onto that for another 10-20 years until we downsize and the kids move out.

I got three young kids from 5 to 12, and both my partner and I are in early 40s.

My key objectives would be to achieve financial freedom in about 5 years time (but I would like to continue to work, and I don't like retirement), and help my kids with at least 20% down payment of a decent two bedroom apartment.

My plan would be either to find another run-down property and do another flip project, but this needs a loan amount we cannot obtain; or every few years I try to buy one property for each kid that I can pass along to them, so that I can lock in the purchase price for them earlier, and pretty much keep it cash flow neutral or a bit negative, then let my kids take over when they start working and make the mortgage payments themselves. Ideally, I would also like to get a two-bedroom for ourselves that we can move into when we sell the PPOR and downsize.

Would this strategy work? Also, any creative idea to improve my serviseability? Ideally, I would like to start buying again next year, hopefully the market is down and it is a buyer's market then.

 

Thank you for responding.

Partner hasn't worked for a few years when the kids were all small. Just bought a small and reliable business this year, so nothing left in redraw, but combined income will increase a fair amount from this year onwards. Just I am not sure how small business could help with the loan application when the business just started. I heard for small business you need two years of tax return before they would take that income into loan consideration. So my partner's income isn't accounted in my conservative planning for the moment.

Compared with apartment, in fact I would really want to help my kids get some house/land in the 20 to 30 kilometres ring or further. However, the accumulated land tax kills the cash flow for many years before I can change that into their names. Thought on land tax?

Ever thought of maybe one day selling my current place, and then do another big flip project to get the most out of PPOR tax benefits. Stamp duty and transaction cost seem too high to make this very profitable. And flipping isn't an easy task with family. Sigh~

Tax is difficult to avoid either way I want to go.

 

Hi SeaSky

Great work on your journey, but I’m totally confused by your message as between the two homes. So just for the sake of clarity…….

1) Which house has just had the major renos done….your PPOR or your IP ? Or are both fully renovated ?

2) And which one has the granny flat ? Do have an outside party renting that whilst your family lives in the main house ?

3) If your PPOR has a potential gain of $1m what’s the potential unrealised gain for your IP ?

4) When you talk about flipping, which house are you looking to sell, or are you simply referring to the renovation process and wanting to hold both and just step up into a third one to also renovate and hold ?

I think people will chime in with good ideas when the picture becomes a bit clearer. Cheers Mate.

 

How would you make income?

 

I've renovated both. A smaller renovation on the IP, and then built the GF at the back of that IP. Potential unrealised net gain after the cost of the renov and building the GF would be around $1.2-1.4 mil. No plan to sell this, but want to pay this off one day and retire on the rent. We have a quite frugal living style, and the rent from that place shall be enough to meet our life style.

The PPOR had a major reno and extension. The gain of $1m will be reflected in market value now, and will be realised only when we sell this and downsize.

I guess you are correct, mine is not real "flipping", as I am holding onto both of these renovated places without plan to sell until downsizing.

Maybe I would consider another renovate-then-hold IP, if the loan works out and I find good deal. And I like Y Man's comment, that I may need to consider asset protection now. Consider investing through a trust structure?



.

 

Net cash flow is poor from the property. Still living on the income from day job, and let the day job's income to help me sustain the investments.

Most of the equity and biggest value sit at the PPOR. If I sell my PPOR now and downsize to a house at 1mil range, and sell my shares, I should be able to consolidate and get enough net income to meet my current life style, but that is a last resort. Want to grow the pie bigger and stay in a good suburb And want to set my kids up for an ok beginning too.

Any thoughts and recommendation?

 

You ask would this strategy work - which strategy? Selling and investing?

 

Good question -- seems like I don't have a set strategy. Maybe to put this another way, my plan is to keep buying and accumulating even though cash flow is negative, then wait until downsize time and sell the PPOR to move into an investment property, pay off other IP(s) and live on the rental income. Implementation details will be adjusted depending on the family financial condition and market condition.

 

Yes, I think that can be a great strategy. But don't pay off the loans on the investment properties. Put the money in the offsets and then use this to live on, if rents not enough.

See
5 Living Off Equity Strategies to Speed up Retirement 5 Living Off Equity Strategies to Speed up Retirement

 

Thanks. I read this before. But now reading this again it makes so much more sense.

 

great work on your previous investments. One thing to also consider is the amount of land tax you are paying if you are holding all your investment in one state. if you have already past your land tax threshold, the amount You will pay each year for the next one will likely to be fairly significant. You can consider invest in different state with generous land tax offsets and perhaps better yield. If you wish to invest as a trust then Adelaide, Brisbane and Perth has land tax free threshold for trust too.

 

Thanks. Yes land tax is an issue for me now. May consider Brisbane and trust.