Stratergy That has worked time and time again ???

Are there lots of these around ? We recently moved to Sydney have missed the latest sydney boom but still want to get PPOR. Because we missed the boat want to see if we can't turn this into an opportunity that benefits us in the longer term by thinking more creatively - wondering about buying something with a big enough block where we can built either front or back, live in/ renovate/improve enough to increase val to help build 2nd house on same land without subdivide costs, and rent out to help pay down and ride next boom. Looking at North Rocks ? Thoughts on this strategy great appreciated

 

Up until a year ago the strategy that consistently worked was essentially renovate and hold, aiming for a 5% yield prior to renovation and improving it from there. Renovations were primarily cosmetic, cheap and generally DIY. The price point tended to be in the $200k - $300k range. This is a very affordable price point so there's scope for cash flow growth and capital growth at the same time.

The problem with continually accessing equity for deposits is the yield generally doesn't grow as fast as the equity, so constantly going back to access equity leads to a point where you hit a servicing brick wall and have trouble moving past it. Accessing equity to recover the money put in and renovation costs is fine, but limit it to that and it will pay off in the long run.

By virtue of not squeezing every bit of equity all the time, after about 5 years, an IP should cover it's own costs and contribute the overall servicing criteria.

With a good income this strategy has lead to quite a few people building a $5M portfolio over about 10 years, in a relatively safe manner. The first few years sees the purchase one, perhaps 2 properties a year, but it accelerates after that. Finding more deposits is difficult and requires savings discipline, but this gets easier as the cash flow starts to contribute later on.

The same strategy can be applied today, but it's going to take longer. There's a few things that can be done to make the longer time frame work in your favour as well. Instead of simply going for the bottom end of the market where the cheap cash flow properties are, look to the locations that will consistently grow both in capital and cash flow.

Growth is the key. It doesn't matter how good the cash flow is at purchase, it doesn't matter how far under market value you bought it for. If it doesn't grow in cash flow or value (preferably both), eventually it will be a problem.

Other value add strategies will accelerate the plan. Developing is a good way to build some capital and some cash flow, but it requires a massive amount of capital to get started. Selling a property can be a good move from time to time. Make sure you speak to a broker before selling so you understand the servicing comparison between selling and keeping the property. At some point selling might actually hurt your ability to purchase more, even though it give you a cash injection.

Pay off your PPOR debt as quickly as possible. It only holds you back and does nothing to help your portfolio. Better still, rent instead of having a PPOR debt. Borrowing $600k+ for your PPOR will effectively cripple most peoples investment strategy for a decade or more. (Mind that I don't follow this advice myself, but my portfolio is already in a reasonably healthy state. I lived in a cheap house for over a decade before upgrading to the expensive house I wanted).

I almost forgot... Don't have kids. Live with your parents.

 

Appreciate the detailed answer @Big Will, helps me try to figure out the figures in a more detailed way and see what's actually achievable as opposed to only applying my basic understanding

 

Be very nervous when others are gready. Be very gready when others are nervous.

 

Im glad you pointed that out , see I was thinking of buying close to the city io but it was gunna be negative geared and now i want to find somthing netural . Thats not going to tie me up to my job (my whole point of investing is leaving my job not getting stuck to it lol)

 

Love your post, so much info thanks ! Not sure I agree with the above bit though, in our case a $900k mortgage will be only slightly more than our rent and we will still have $4k/month in savings which we plan to use as a deposit for x 1 property per year at $350k or $500 every two years or something like that. So not sure we would be crippled ! And too late on the kid tip, thanks I have two !

 

The LGA I am looking into requires the second dwelling to be strata titled before leasing with separate utilities. Seems expensive and maybe not worth it for just one extra dwelling. Did you find this the case with any?

 

Fair point from a cash flow perspective Jenny. The difference between renting and mortgaging a property is that lenders take the rent you pay as a liability for the amount the rent costs. For a mortgage they load it at a rate of over 7% (almost twice what your actual repayments are).

From the lenders perspective, if you were renting your house instead of owing it with a mortgage of $900k, you'd probably be able to afford another $1.6M in IPs (the extra rental income gives you the difference).

I like your plan. Slow but steady and given time it will take you a very, very long way. No real risk in the portfolio either.


As for the kids, I'm wondering if it's possible to sell them to science? Improved cash flow, extra cash from the sale and studies have shown people without kids have less stress and are happier!

 

Good point, but then you get into the argument of the renvestor vs owning debate and this gets into more emotional vs pure financial reasons. Not sure I could rent forever and be at landlord mercy of moving when it suits them instead of me... My plan also includes saving for a great holiday once a year because see you have to live also. Theres the possibility of being hit by bus and a wide range of other misfortunes, life has a way of throwing curlies derailing the best of plans Look at me, happily living the life in Brizzie and bam before you know here I am in Sydney looking for house at the top of the biggest boom ever. Great !!! But you just have play the cards you have at the time

re, the kids the banks certainly view them as a liability in their assessment thats for sure ! Science wouldn't be interested in mine

 

No Tim, the utilities were separate and on a single title.

Have done them in NSW and VIC and haven't subdivided or strata(d) any of them.

Things may have changed over the years and I retired quite a while ago so haven't kept up with it all.

 

I thought about using this strategy , how many propertys do u got debt free ?

 

All of them.

 

Hey Sanj,

All your friends and you own huge businesses with good returns.

Start selling some business ideas.

 

How many is all of them
How old were u wen u started ?

 

Correct. I am onto my fourth project like this and I have found them very difficult to source. It takes a lot of time, effort and home opens to find. One that suits me comes along every 3 to 4 years, so definitely not for those in a rush.

Not in my experience. My most expensive reno to date was around $10k. This is for a lower end rental, so a secondhand (good condition) gumtree kitchen was the acceptable level for this job. Many materials for the reno came from gumtree and we did most of the work ourselves, which saved a lot of cash.

First 2 projects were bought on 105% lends, no LMI, so you don't necessarily have to start with a 20% deposit or pay LMI. It depends on how you structure your finances. For example: use the new property to finance 80% and use another investment property or PPoR as security for the other 25%. I have done this and refinanced down the track once the IP increased enough in value.

My strategy was reno and hold, so after reno the rent increased substantially. One example: pre-reno rent was $320 pw, post-reno rent was $440 pw.

Agreed. Someone who can't inspect a house themselves and spot the issues (or potential issues), backed up by a good building inspector, should not be trying this strategy. My investment partner and myself and inspected over 100 houses and are now very good at spotting the red flags. Of course a good building inspection will back up your initial thoughts. But yeah, especially in WA you need to know what termite damage looks like, what foundation issues do to a house, how to check if there are issues in the roof etc.

Onto our fourth project and no nasty surprises so far (fingers crossed). What this process has taught me is that you really need to know what you are doing. For example, inspecting houses with huge red flags then seeing them under offer. You wonder what issues the purchasers uncover.

 

I am not prepared to disclose "how many is all of them", sorry.

I started at 22 years old.

 

W

Where are you looking at the moment?

 

Right at the moment I am not actively on the hunt but I will be in about 2-3 months. Will be looking in Brisbane and Adelaide for development sites.

 

If not double story how are they dual occ? What sort of house are they or were they originally?

 

@Leo2413 haven't you got enough in Brisbane??