Stratergy That has worked time and time again ???

Not a fan of using leverage?

 

Paying houses off by using the multiple rents from the previous ones is a pretty big lever...............

 

What size portfolio in how long a period could you build with this strategy..?

 

That is once you've got multiple properties paid off.

Actually, wouldn't your strategy be simply be considered plain old compounding?

Compounding combined with leverage is where the magic happens.

 

Hi, I am quite fortunate in that I have a large amount of equity in my PPOR, it should give me about 2.5M buying power which I will be using in the next 12ish months, I will be looking to buy between 400 - 600K in QLD and I will hold them for the period of 10 years.

When I retire (it may be longer than 10 years, I am waiting for another Sydney boom, it may be 15 years), I will sell the PPOR in Sydney as there are no capital gains to be realised on a PPOR and pay out as many IP's as I can, I will then start selling off other IP's down to a point where I don't owe anything and I have a bunch of IP's paid out. This will create my passive income.

If I can time it right, I am hoping to have enough equity a year or 2 before the next Sydney boom to buy another 1 or possibly 2 places in Sydney and ride the boom, it would be a great way to make a quick buck and hold on to some more of those IPs up in QLD.

 

It would depend on your determination to pay them off quickly.

 

The leverage increases as each one is paid off.

Yes, the worlds greatest invention.

There is no magic in any of this............

 

Thanks Dan. Good reading, and I hope things go really well.

Have you had any discussions with brokers on serviceability (vs buying power)? In my planning, I'm having trouble getting past serviceability even with cash and equity being available. The cash obviously helps lower the LVR and does slightly increase the number of properties, but of course using that cash limits the number of properties as well!

@Terry_w had a nice rule of thumb for serviceability (note that it doesn't really matter how much cash or equity you have) of your annual income x 6. $2.5M would mean you need an annual income of about $420,000.

 

I don't earn 420K . I do however pay 3.25K more than my minimum mortgage repayments each month, this means I have plenty of room to service loans in the event of an untenanted situation.

 

Great strategy I like it

 

I dont believe any one single strategy is the way forward, it can work at various times of course and over the long haul buy and hold resi IPs will more often than not result in some decent windfalls but what if the timing isn't right or you want to reach your goal quicker?

I think constantly learning, looking for opportunities within and outside of your current comfort zone and knowledge level and regularly looking back and ratinf/critiquing your performance to see what could be improved will be much more lucrative.

We are fortunate to live in a time where information is readily available, it has never been easier to learn something new and never been easier to start a business or side venture, even with low amounts of capital. We live in a country where it isnt hard to get a decent paying job, there are lots of safety nets and the standard of living is very high. Taking small calculated risks are highly unlikely to be the end of the world and even if they fail there is time and opportunities to make up for it.

Personally ive invested in property, started a fair few businesses, invested in other businesses, done a fair few value adds in property and also now consult to others based on learnings/skills /experience I wouldn't have if i had not taken these risks.

Don't limit yourself to the one strategy in the long term, no matter what it is. There are of course exceptions, a friend still in his 20s now started a business that's making multiple millions a year after paying him a massive (and I mean massive) salary, for the time being he isn't interested in much outside of that apart from silent investments in a couple of companies but with results like his who can argue with the approach. Even he intends to diversify and put money into a few asset classes so that when he sells the business he still have good income coming in.

 

Just my opinion of course, this approach can be seen as riskier in some aspects and I suppose it is but not nearly as much as some might think.

It is also nowhere near as risky as doing nothing, which imo is the riskiest approach financially for anyone who isn't earning a huge enough salary to retire off the savings.

 

Love this strategy. Could you give an example of the type of duel occ properties that you search for? i.e corner blocks, double story properties etc..

 

Corner blocks, or blocks with the house located in a way that allows driveway access to the rear of the block.

Never double story.

 

Nice. Do you prefer detached dwellings? What size blocks do you generally go for?

 

Detached, 1/4 acre.

 

Buy hold and improve strategies always fascinate me - always sounds good but for the strategy to be successful you need to firstly

1. Buy below value - easier said than done. You want a decent property with add value opportunity in an area that is either rising (competitive) or going to rise (speculative pick) where the seller either doesn't know the value of his own asset (unlikely), doesn't really care how much he gets (again unlikely) or is desperate (distressed sellers rare and finding it could take up your entire life time wise).

2. Being able to add value means you have to have cash on hand to do the reno as the banks not going to lend as part of the loan - not everyone has lazy $50k cash sitting in the bank for a reno and even if you do it would be deposit for another property anyway. Yes you can pull it out after reno and reval but you need also to have started with a 20% deposit in the first place - I'm told pulling equity out for less is difficult and may have LMI implications

3. Doing renovations is exceptionally hard to make money from (forget the TV shows). You need to have a very good understanding of what needs doing, what spend will give you most return and a long list of tradies that won't rip you off and turn up when they say they will plus you might have to do some of the smaller work yourself thats trades are not interested in (they can be picky) which means you need to buy something reasonable close to where you live that match requirements from no 1 above. And none of this takes into account any nasty surprises like termites when you pull a wall down or rot in the roof or anything a building report didn't pick up (because usually they are not worth the paper they are written on anyway)

Just saying....in pays to go into this with eyes wide open.

 

Was about to ask this question as all along I've been using the 88% in my figures without thinking how much I could withdraw after a reno given the higher LVR. Is there a 'sweet spot' where lenders are more likely to allow equity withdrawal or is the 80% the standard for most?

If I buy and reno on 88% LVR and add $100k to a craphole $400k IP, how much could I potentially extract? I'd have figured 80-90% of that $100k, is that correct?

 

Depends. Banks also look at the new servicing requirements also, check out my recent cost to refinance thread. A broker there said "Practically it's extremely difficult to get an equity release above 90% these days. Actually getting more than 80% can be tricky..."

 

My guess;
400k 88LVR = 352,000 (48k your money/zero equity to be drawn)

500k 80 LVR = 400k loan (100k your money being 48k your original deposit + 52k equity gain) = 48k equity to be withdrawn.

Lets look at an amazing scenario where you spent 25k reno for 100k val
from this 48k you made 1:4 that would mean you are 23k (as the 25k was yours before) but you still had to pay stamp duty (lets call it 15k). Ontop of that it took you 3 months to complete the reno and your loan rate is 4.5% IO so you paid about 4k in interest

So you effectively 4k ahead or 1% gain, not much gain and there is a lot of risk as this is the amazing scenario!

A more realistic would be 1:2
So reno cost is now 50k + 15k stamp + 4k interest or useable equity = -21k

I am not 100% sure if this is correct but it is really hard to get the extra funds

The reno shows that I see on TV are American where they pay cash for mortgagee sales that are not public auctions, held in carparks and bought unseen. Our banks are unable to do there garage sales and the banks have to prove that they did everything they could to get FMV by advertising it correct (re.com/domain) and interview agents in the local area and selecting one from there. The thing the bank doesn't want is the mortgagee to claim the property was not advertised correctly and they just took the first offer (hence why most will go to auction).

Like most property and esp in renos, you make your money when you buy. If you pay FMV for the house you are going to be behind the 8 ball.

If you bought the 400k house for 350k and spent 25k to get a 100k improvement and the valuation was then 500k.

350k property - Loan 308k 88LVR (42k your money).
500k - 400k loan 80 LVR (100k security = 42k your money 58k equity) 92k useable equity
interest 3.5k (3 months @ 4.5% but on 308k)
stamp 15k
Cost total = 18.5k
or 73.5k equity

Minus your reno cost (25 or 50k) means you are either 48.5k or 23.5k.