What I learnt out of buying 7 properties

Discussion in 'Investor Stories & Showcase' started by David Shih, 3rd Jul, 2018.

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  1. Sharmatarun2021

    Sharmatarun2021 Member

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    Great post David, I am just starting out my Investment journey and trying to learn at this stage. Great tips in your post that would help me for sure when I am picking up my first IP.
     
  2. momentum26

    momentum26 Well-Known Member

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    All the best Tarun.
     
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  3. Sharmatarun2021

    Sharmatarun2021 Member

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    Thank you, would need that
     
  4. David Shih

    David Shih Mortgage Broker Business Member

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    It's been a while since I was able to find time to write and expand on my lessons learnt - but the beauty of this is now that I have a few years of broker experiences under my belt, I also get to see things from Mortgage Broker angle as well rather than just from Property Investor angle. As they say, property is a game of finance and it's absolutely true!

    So I thought to share one of the lessons today talking about borrowing capacity - the credit cycles.

    Just like property prices and many things in life credit also has its own cycles. There are times where banks are literally throwing money at you - think of around 2015 period where I was told banks are literally approving loans left right centre. Or even more recent times during COVID period with RBA's Term Funding Facility (aka money printing) for the banks which in turn banks are aggresively lending out to Australians with ultra low rates. These are times where it's easy to get credit.

    When credit is cheap & flowing freely - investors can get access to money easy which means property prices continue to go up. We've seen how this has panned out in the last 2 years.

    And then there are times where lending are more difficult. From what I can remember around the 2014 period where investor lending are starting to be restricted and that's when the music starts to stop. Around 2017 period where APRA has then put in Interest Only lending restrictions of no more than 30% in a financial instituion's total lending further restricts bank's ability to lend to investors. Or even fast forward to today with the fast & furious cash rate increases since May 2022, coupled with the 3% assessment rate buffer means borrowing capacity has literally reduced 30% or even more for most borrowers. These are examples of times where lending is difficult or going against the tide - and thus prices are now dropping as sellers are forced to meet buyer's budget.

    So what's the moral of the story?

    For any property investors, I think it's important to recognise the fact that credit goes in cycles. Gone are the days where you can build a property portfolio up to like 8 - 10 properties in one go - instead, we need to adopt the mindset that it'll be a accumulate -> consolidate -> accumulate type of process. So for example, a starting out property investor may only be able to purchase up to 3 IPs due to current resources available on hand and a tightening credit cycle. However when credit cycle eases up, property values goes up and the properties had a bit more equity, he/she can then look at refinancing the loans back to a top tier lender and potentially extract equity out to continue funding further acquisitions. Rinse and repeat. Alternatively, use this opportunity to review & re-position the portfolio by selling down some IPs, take the profit and then recycle that fund to purchase better quality IPs.

    As they say - Rome wasn't built in a day, so I do think it makes sense to adopt the same approach when it comes to building a property portfolio in the current times :)

    Cheers,
    David
     
  5. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    One of the best lessons people seem to acquire and fail to acknowledge is patience. Its a long run game. In that time things change. Cycles go up and down and this can also include credit availability etc. Family situations change too and so do careers and incomes. Anyone starting in the 1980s will have found it VERY difficult as lenders didnt really lend much for investment. The 90s saw credit deregulated but really high interest rates didnt attract investors. Tax changes, land taxes and other taxes have become a cash cow for states. The asian and global financial crises saw credit hit and eventually sort itself out. Values have risen in stages with some falls in between.

    Time and preictability arent features but those who can capitalise of the relevant periods before it took off have done well. However not all. Thos who leveraged continually may have a sizeable "portfolio" but the reality is its NET value is what counts. The present period is when some may need to consider the impact of rising rates and affordability. For the next time when values rise perhaps. Some may have leverage equity into less equity and the times ahead wont be as easy as the past. But it may open up opportunity if you can pick the low point prior to a boom again. It wont be a while. And for the first time in a while I am speaking to investors who have negative enquity in some property. The quandry they face - do they sell and clean their position or hope it doesnt get worse and ride it out ? I imagine lenders are looking at some borrowers the same way.

    One thing that counts against some investors is personal optimism. They dont want rates to rise and values to fall but it is happening. . They seek to avoid that conflict and wish it away. A decent income earner is going to ride it out better than someone facing a job loss and lower income etc When values fall etc it can snowball so selling down becomes more than one.

    I can recall the last down time and my same view applies. Those who dont have to sell may fare better than those compelled to sell. You only truly lose money when you sell. BUT the uncertainty is the hard bit. Can you afford to keep what you have...for the medium term ? Buffers help, Offsets help. Income helps. The last down we had was actually quickly turned into a boom. I suspect it wont be so brief this time. Another skill for investors would be the ability to read minds and see the future.
     
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  6. southern-investor

    southern-investor Well-Known Member

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    I agree that it is very very hard to build up a massive portfolio in this day and age. I remember the good ol days bought 6 properties in a single financial year and before that it was at least 2 properties per year every single year.

    Now, the prices are way too high and serviceability is a big issue. That is why I am hesitant to sell any of my existing properties because I know even if the capital gains I will get - I most likely will fail serviceability still.

    I still remember one of my brokers back in the day would write like $500 monthly expenses and not a single bank would blink an eye or question it.
     
  7. Ruby Tuesday

    Ruby Tuesday Well-Known Member

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    You can still sell and keep the loans transfer the security if you have had capital gain,buy higher yielding property and higher yielding and/or high growth shares to fund more purchases. I dont get this never sell mentality, whats the point ? be the richest man in the cemetry ? I have been selling down since I was 52 so that I can get to spend the loot otherwise I will run out of time to spend it. Planned on selling one every 5 years but bought more, now I have to sell one every 3 years so I can spend before I turn 90. Sold 2 in the last 12 months, one a dud losing money and reducing servicability. The other had yeild compression to 2% which is though it has had good yield growth,not a yield to maximize servicability from growth of capital, I can get franked up divicend of 7 times that yield and more capital growth and liquidity from shares.
     
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  8. southern-investor

    southern-investor Well-Known Member

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    It depends on where you are in life. Your over 50 already maybe even late 50s now. I'm not even 40 yet. Big big difference there.

    Problem is I make very good income as well and dont need any money at all. My income allows me to do what I want, when I want. I am planning on upgrading my PPOR soon so I may sell 3-4 properties to buy that but other than that I dont need to sell yet.

    Maybe when I'm 50 or 55 that will change.
     
  9. David Shih

    David Shih Mortgage Broker Business Member

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    Indeed, that was the time when lending is so relaxed I would question whether there was any "responsible lending" at all. In a way, that was the golden time to be able to built a property portfolio, whereas since APRA stepped in and re-wrote the rules it's all about putting the handbrake on for financial/banking stability.

    This has a direct correlation to the reason why the rental crisis is getting worse as each day goes by. I can't recall vacancy rates being so low back in the days, whereas property investors nowadays are simply capped with lending and how many properties they can buy which translates to less properties available for rent. Not exactly sure how this problem will get solved in the short/medium term but I do feel for the renters out there.

    Cheers,
    David
     
  10. MWI

    MWI Well-Known Member

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    I like your mentality, opposite of never sell, is it spend it all, and how can you plan that? I suppose by 100 years old.:)
    I think it depends on personal wants and needs, stages in life and ages, if one's portfolio increases more than the actual spend, etc... why should I now be spending more, how much more, selling more, because I am getting older?
    Spouse recently suggested just from SMSF if we were selling all RE in stages/years we would have enough till our lifetime, yet alone other RE.
    So, I agree in part. We plan to sell some and pull out from SMSF, as we prefer to direct our funds elsewhere, but why should we sell all eventually when we can just leave it to our family's estate.
    I heard somewhere that around $270B is being passed through estates so it seems many people are leaving lots of wealth, let's hope they at least enjoyed some fruit of their labour, their working life. ;)
     
  11. Danny370z

    Danny370z Well-Known Member

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    Until the rules change and the death tax comes in... The Goalposts are always moving.
     
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  12. MWI

    MWI Well-Known Member

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    Totally agree, but isn't the whole life about change and goalposts always moving? I often say if there's a storm out in the sea when I am sailing, I cannot change the storm, all I can do is change my sail, how I will sail.
    Hence, why selling some in SMSF soon before more rules change and pulling out funds, as we prefer to help our kids now rather than when we die.
     
  13. inertia

    inertia Well-Known Member

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    Why is it people don't complain when the goal posts move to be in their favour...?

    Yes, the goalposts are always moving. There is definitely some sense in being flexible.
     
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  14. sash

    sash Well-Known Member

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    Ditto ... human nature no one says anything when property goes up 50% in 2 years....god forbid if it goes back 20% in 2 years.

    I find it actually quite funny....
     

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