What should be my next purchase?

As the title of this thread states – “what should be my next purchase?”

My goal is to optimize the amount of wealth using the capital, income, time and other resources I have. Currently, this is my situation:

- OO: Value at $850k, remaining debt at $680k, 80% LVR, 1.94% fixed 2 year P&I loan, home & land package in North West, bought in early 2017 for $700k, finished construction in late 2018.

- IP1: Value at $760k, remaining debt at $685k, 90% LVR, 2.99% variable loan, $650pw rent, gross yield of 4.45%, 4 bed established house in Maroochydoore, Sunshine Coast, bought it this month

Savings of about $100k cash.

What should IP2 be like in terms of (gross/net) yield and price range so I can continue building my property portfolio and generate wealth?

My borrowing is estimated to be about $500k right now for a P&I loan. I could go for a 4 bed house in Rockingam WA for about $500k with about 4.5% yield. After this, I am tapped out and can’t borrow any more. I will have to wait a few more years before I can go again. I want to accumulate as many properties as possible now, and let them grow over the next 20 – 30 years and pay them off slowly.

Or is it better to get extremely high yielding properties now such as 2 x 11% yield units in Cairns that sell each for $150k and rent for $300pw each. Yes, they are there, and I can find them. Of course, I am going to get very little to absolutely no growth, however, at least my borrowing capacity shouldn’t be affected severely for me to borrow again. This will enable me be to purchase a more growth oriented property that is at least neutrally geared or somewhat positively geared. Is this strategy of mixing capital growth properties with high yielding properties a good streatgy or not? For every 1 x CG property, get about 2 x CF properties.

I realise that capital growth is the bees knees of wealth generation, but cash flow keeps me in the game and enables me to continue borrowing.

So what should the next purchase be (IP2) if I want to accumulate more properties and more wealth? I know there are other ways to increase borrowing such as increasing my salary, doing reno on current properties, partner with someone, etc., but these are not viable or highly likely to occur anytime soon.

Also, what's the required yield percenatge to ensure that borrowing is not affected at all? I heard it was about 11%, but it would be great if someone can please confirm and what's the math behind this.

Would this yield be a gross yield (rent / sale price) or net yield (rent - property expenses / sale price)? Would paying high body corporate fees on units reduce my borrowing capacity or do lenders not look at them as they only look at rental income?

 

You don't need to go to Cairns, it is affected by a downturn in tourism.

Perhaps Ispwich?

Adelaide's Far northern suburbs can be cheap as well with fair yields.

Ipswich would be better than Cairns.

Rockingham sounds good also.

 

The location isn’t of concern for me. The yield required for my next purchase to enable me to borrow more is a paramount issue. What yield do I need to be chasing for my next purchase so my borrowing isn’t affected for the next next one?

Depending on that yield percentage, I can determine the location that satisfies that yield. Ipswich and Adelaide far Northern suburbs don’t offer yields close to 10%, but Cairns does. I know Cairns has a downturn in growth, but it is still strong in rentals. I am not chasing growth prospects for my next property, just yield. I am looking at Rockingham more for CG, but to also be neutrally geared, but this will only be after I purchase a very high yielding property (close to 10%).

 

good luck with all that

 

Yes property is a numbers game. But if all you look at are the numbers with blinkers on, you’ll find yourself with duds!
Cairns units with 11% yields might look good on paper but have you considered; high vacancy rates? Bigger strata costs? Higher insurance costs? Start by deducting those numbers from your yield and see the impact. Oh and then compound that with little to no growth.

Id be listing to @boganfromlogan, at least you’ll get some CG over time in the capital city markets mentioned, particularly if you buy land.

 

For information purposes only....not a recommendation. Your Cairns unit will come with Strata Fees. Not sure how much that is, but if it's considerable, that's going to cut into your returns. If you look at the Elizabeth suburbs, you can get some insane yields on stand along homes or maisonettes, which may suit your purposes.

 

I have moved on from looking at Cairns units because of extremely high body corp fees which brings the net yield from 10% to more like 7%. I realised that Lenders look at "net" yields and not "gross" yields.

However, there are other properties with duplex units in NE Qld (such as Rocky, Bundy, Mckay, Townsville, etc.) that offer close to 10% yields. I don't expect them to grow much (even though I am buying them at the bottom of the market), but they should help with cash flow to ensure I can continue borrowing and purchasing more CG-oriented properties in the future.

AIM: To build wealth and optimize wealth generation using the available capital and savings, and over a long period - 20 years.

STRATEGY: Acquire multiple CG properties. I believe chasing CG is the optimum way to build wealth.

PLAN: For me to acquire multiple CG properties, I need to maintain my borrowing capacity. I can’t do this unless I manage my cashflow. In order to do this, I need a high yielding CF property now as my 2 other properties are just neutrally geared. Once I purchase this high yielding property (NE Qld Duplex), I will go for a more CG-oriented property such as in Perth.

Are there any issues with my Strategy and Plan to achieve it? Would be good if the explanation has some numbers to back them up, but even if there aren't, then that's okay.

 

And what yields were you chasing and actually getting from shares and commercial property trusts? I know commercial property yields are high (>6%), but it seems that you can get that some residential proeprties as well.

 

Although your thinking is correct that you need CF to continue to grow in your journey to build up a significant portfolio there needs to be a balance. CF positive/neutral properties + CG potential you need BOTH to succeed and become wealthy. CF alone wont make you rich it just keeps you afloat.

As some others have mentioned stick to major city hubs. I'd rather buy in Ipswich/Logan/some Adelaide suburbs that still provide some decent yield but the chances of them growing is significantly larger.

These days with all property prices soaring finding a CF positive house along with something located in a half decent suburb is getting harder and harder.

Your strategy has worked for many in the past (including myself) but that is because we entered the market heaps early where homes were very undervalued. Most of my places are paying themselves off now so I just sit back and relax + they are growing significantly in capital growth.

The news is out now and even in suburbs traditionally that could provide you this, it wont be possible in todays climate. Building a large portfolio these days is very very difficult compared to before APRA days.

 

Cheers for your reply. I based my plan after talking to my broker. So here it is - if I purchase a 10% high yielding property (IP2) now, then I can borrow up to $400k at 90% LVR for my IP3. If I purchase a 5-7% yielding property such as the ones you mentioned in Logan, Adelaide, Ipswich, etc., then my borrowing for IP3 is extremely low. While IP2 is going to be significantly high yielding (not expecting any sort of growth here), IP3 is going to be more slightly positively geared (4.5-6%) and more growth focussed, say a Perth market.

I thought I diversify too in terms of market types. I already one in Sydney (just CF neutral, but more CG oriented) and another on Sunshine Coast (slightly CF positive, but more CG oriented). I thought I get one in another different market, which is Perth (IP3). Perth and Sydney seem to grow at opposite times. While the commodity market is strong (high Aus dollar), Perth grows, and vice versa. Perth is also at the bottom. If not Perth, then some proeprty in the Moreton Bay Region.

I get what you mean. I should have gone with those properties in Logan and Adelaide earlier that have a mix of yield and growth, but I missed it by focussing on CG oriented properties early on. Now I am chasing yield, otherwise, I will run out of borrowing soon and it's game over for a while.