What to do next?

Hi guys... given market uncertainty what do you think I should do next? My numbers at a glance...
Income. $163K Gross. Offset $30K. Super $188K. Shares. $8K
PPOR. 4-2-2 Home on 477m2 in South East. Loan $520k... Val $940k.
IP. 3-2.5-2 Townhouse on 390m2 in Bayside. Loan $472k... Val $850k. Rent $582 pw.

Now I will must admit... I was brought up with the mindset to pay off your mortgages and only very recently started to educate myself in the ways of PI and Investing in general...

Options I have thought of...
1. Draw equity and purchase second investment property.
2. Status quo... riding out the next 12-36 months and see what the market does. Trying to build offset account as much as possible. Just recently moved IP to IO loan as I was paying it off too quickly... novice mistake
3. Sell PPOR, move into IP, live mortgage free virtually and wait for the market to soften before jumping in again? This is what the old me says to do

I'm 33 years old so in absolutely no rush... any and all thoughts are welcome and valued. I am recently married also and my lovely wife has zero debt (but also zero assets unless you count shoes/bags ) and has a Gross Income of $102K so another option could be...

4. Buy second investment property in her name? This does have the added advantage of choosing which property to sell in the future if we needed to... maximizing tax advantages (i.e. pesky CGT).

Appreciate there is a lot of content above... and truly value your insight.

 

I see two main things to consider.

1. Your townhouse has a lot of equity. You can pull out equity in it and buy another IP. You can do the same with the PPOR too (do a loan spilt - borrowed funds for the purposes of investment is tax deductible), but I'd do it from the IP first.

2. Your IP isn't giving a great rental return. For your next IP don't buy something so negative as sooner or later you'll have no more serviceability. Note: whatever you buy needs to stack up as an investment, don't just buy for the tax deductions.

For the question of buying in your name or the wife's, I suppose there maybe years she goes on mat leave and will have low income. Perhaps anything you are more likely to sell in the near future, put in her name?

 

I do not think paying off loans are a mistake, if you can easily handle it, then....why not.

If your home is always going to be home, you pay that one first.

You are going to end up on P&I eventually anyway.

As to what to do exactly, you need to work that part out.

 

You have far more options that you have considered

PPOR - Draw out 232K equity in a new sub account. Interest Only 80% LVR
INV 1 - Draw out 208K equity in a new sub account. Interest Only 80% LVR

Purchase several INV properties , using the 440K funds * above) to fund deposits + stamp duty + costs + a small cash buffer for each property (say 5K)

Borrow in both names - so your income and your wifes income can be utlised.

This will also mean you can add some additional deductibility to your taxable income, and add some to hers

In theory (subject to borrowing capacity, which should be straightforward at 80% LVR) you could purchase an additional 3 x 500K properties easily

Each purchase would use @ 125K of equity ( 20% + stamp duty + legals + cash buffer) .
By purchasing 3 , you'd be using @375K of the 440K equity - so you'd have 65K cash reserves.

This is a fairly conservative use of the 440K equity available to you. I could just as easily model how 440K could be stretched to 5 or perhaps 6 x 400-450K purchases ( some at 90%, some at 80% ) but it appears from your posts you are reasonably conservative.

Or, do none of the above

 

I'd strongly consider selling the ppor and paying off the IP and making the IP your PPoR. Bayside is a lovely spot to raise a family. It has experienced great growth, and the longer you live in it the lower your CGT bill will be.

Now with almost no non deductable debt I would do a number of splits and then buy newish properties that are sub $500k that are almost break even pre depreciation but have substantial depreciation benefits. Turning the new ppor into completely deductable debt. Then I'd focus my surplus income into either offset accounts on the debt or LICs and ETFs.

 

With the amount of uncertainty ahead with the australian economy I woulndn't buy anymore ips. I think it's too early to say how next the 5 yrs' of property market would like. If i was you would hold and monitor for now.

You don't have a lot of shares, I am a big fan of vanguard s&p 500 index fund for the following reasons. 1. The american economy is going well 2. typically republicans favour big corporates 3. I think these companies will continue to thrive especially in south east asia and africa (the next wave of big growth) using both their size and global presence.

 

Thanks buddy - that's what I am thinking... if I do buy another IP I will put it in my wife's name or joint if we need to. My current IP was originally my PPOR and purchased in 2009. It has been rented out since 2012 in a beautiful part of Melbourne's bayside with only 2 weeks vacancy over the journey to date which I am stoked about
FY16 only recorded a $4.4K loss - thought that was good...? I'm looking more for CG and not positive cash flow.

 

Thanks Dabbler - neither of these two homes are my forever home (if there is such a thing)

 

This is the bold route... no doubt. The inner cowboy in me wants to go down this path
I have started by contacting a broker to suss out borrowing capacity as I am mindful things have changed since last time I borrowed... hearing P&I @ 7.5% across total portfolio which may put a sting in borrowing capacity.
I guess in a way they are trying to protect consumers... by extension themselves.

 

Yes this was where I was getting at with option 3... my only concern is if I sell and buy aren't I just increasing all the associated fees (agency/stamps etc. etc.)?

OH and on the point of Bayside... love the area so much. Lived in the townhouse for the first few years before renting it out so I've also got the option if I ever sell to claim PPOR in either places.

 

I see it as reasonably conservative actually, as it leaves 65K cash buffer.

But I must disclose I see it as conservative within the context a being an investor carrying a 15 property, 8 million + portfolio that generates significant 6 figure CF+ results . I should also disclose I carry 5 Million debt , although its offset by 2 Million cash so net debt is 3 million ... so you can appreciate that I see your situation as being one that could easily be used to create a very strong portfolio. What I outlined previously is , given the available equity... quite conservative - all subject to borrowing capacity of course.

 

So you basically make my $30K offset look like a holiday fund
What is the balance of your portfolio or all Residential?

 

30K is not to be sneezed at. Once upon a time, not all that many years back, that was a lot of money to me. Still is , really.

My portfolio is all resi. Unencumbered PPOR and a good dose of NRAS tax free credits throughout the portfolio. Starting next year I will be adding some dual occ to the portfolio.

I have recently put a couple of hundred K into LIC's, but so far they are distinctly unimpressive. And I do mean DISTINCTLY.

To your original post - if you want what I have, or others here have.... or just improve your position quite a bit, you have to get after it.

I outlined a very simple, logical set of numbers that you can go out and start working with immediately. Not an ounce of "cowboy" in that set of numbers. Just make sure the broker you are working with knows how to build a property portfolio. If they don't - move on to one here who does.

In the end, there are probably 10-20 members here who can post with any real integrity or authority about what it requires to get a passive income for life from resi property. Unfortunately you will be offered advice from many members who, although they are well intentioned and would have you believe they are accomplished in this space, are not even close to getting there themselves. Similarly, most people you will meet in life will be nowhere near getting there either... so align yourself with those who do (and have done) rather than those who talk about doing. Then get after it

 

Yes it will certainly costs you exit and re-entry fees, but you need to weigh up this against the benefit of irradiating all your non deductable debt. Further If you want to grow a large passive income portfolio, then the two properties you hold are not (by the sounds of it) suitable. They are more suited to negative gearing for capital
Gain. As Melb has been going bananas, for me in your position, I would look to cash in and then live non deduct debt free. Then gear up with a clear strategy that focuses on long term passive income. @euro73 post above outlined a good way to do this, and whilst the debt levels may sound scary (and only do what your comfortable with) the premise that the portfolio is cashflow neutral pre tax means you can afford to
hold the debt.

 

I understand. What I am trying to get my head around is how Capital Growth isn't the game.
In the scenario you look at the $500K property range... which I like don't get me wrong... and if I received ~$400pw rent... that would just cover IO loan. So never paying down the debt... so in essence aren't I just banking on CG over time...?
I am patient and don't mind waiting out the years neutral while tenants service the interest but you are still left in the end hoping for good CG.

Now obviously if you could get higher yields perhaps you could move the additional cash flow into offset to pay off my PPOR debt.

I wonder what proportion of >5 res investors have IO across their portfolio. Aren't they too just waiting on CG? Even if you were bullish and said some where positive cash flow... is that positive over interest only... so they could start to slowly eat away at Principle or bank it?

I'm thinking for me the best thing is too look for properties that have the highest yield while still providing strong capital growth potentials (by way of organic or manufactured).

i.e. not $500K @ 6-8% yield but maybe $500-600K @ 4-5% yield but much stronger CG outlook.

 

I am not quite at the >5 stage yet but I have no PPoR debt, so surplus funds just go into offset accounts against the investment loans. This is not the best use of surplus funds but I need to keep those funds available, so it's good enough for now. To give you some idea, one of the IPs interest was down to around $80 pw. This makes a small difference at first but a big difference as you build up more funds in the offset account.

I find this approach gives me options. I can pay down debt, I can use the funds to renovate or as a deposit for another purchase.

 

Here is where the rubber hits the road. Chase growth, and 4 - 4.5% yields, and you will hit servicing ceilings fast. Really fast. My question is then - what will you do with the growth, if you get it? You wont be able to harvest it... so what does it achieve for you? The only way to get at it would be to sell ... which works just fine if you can continue to pick killer deals, sell and repurchase, sell and repurchase, sell and repurchase, sell and repurchase- enough times to get $2-3-4 Million , after paying CGT.... because thats what you will need at a minimum to get 100-150-200K passive income for life. Awful lot of luck involved in that strategy...and an awful lot of risk.Those on here that did it, did so in friendly credit environments. Lets see how many people buying from late 2016/early 2017, will be talking about huge , multiple 100K gains within 12-18 months? Not many.

My personal view, contrary to many here, is that growth alone is now a very limiting strategy, given the changes to the way lenders treat INV lending. Thats not to say growth is not welcome, but building a portfolio large enough to eventually generate the kind of passive income you say you want, requires being a realist , which is polite speak for understanding and accepting that how borrowing capacity works now, has changed... and in turn it requires that you therefore understand and accept that debt reduction must form a part of things, moving forward.

I hold a lot of NRAS and will start holding dual occupancy from 2017, because I understand that to grow a portfolio I must continue to retire debt, specifically in order to improve borrowing capacity. I don't ignore growth - many of my NRAS properties have performed extremely well... so arguments about NRAS or other high yield properties equaling low growth are idiotic rubbish published by the ignorant.... but in this credit environment I know that above all else, equity from growth is absolutely useless if I cant borrow against it. And that sir, is THE key.

We appear to be at or near the bottom of the rate cycle, the top of the price cycle, the end of the mining boom, the end of the resi construction boom, the beginning of a new era of credit tightening, and have a PM and Treasurer completely beholden to a far right ideology which has the country is treading water at best, paralysed by an inability to decide anything, do anything, achieve anything ...... I am not relying on luck or anyone but myself to get my situation sorted out ... I fully expect further changes to super, CG, NG etc... this mob or the next wont be able to help themselves... so I'm not a bull on prices doubling again everywhere in the next 7-10 years. Nor am I a bear. I'm confident in slow, low , consistent growth, but with the Lucky Countrys luck starting to run out thanks to political ineptitude everywhere , on all sides of Govt , combined with aggressive regulatory intervention on INV lending , Im of the view that yield and deleveraging is going to be handsomely rewarded over the next decade or so...

I'd be purchasing new, high yielding stock with great depreciation, coupled with great cash flow... if you do that, and you are patient, and you reinvest the surpluses towards debt reduction, you can retire a lot of debt within 10-15 years and you will be very well set . But that's just my view on things .... its not like I have any record of success in these matters

 

I agree. I'm not factoring growth into any of my projections at all. If there is some, that will be a bonus. But for now, all projections are based on the assumption of no growth.

 

Get to it

 

If you are referring to me, read on...

Personally I would look for opportunities to manufacture equity. For example, this IP in Perth was negatively geared but I am building a new house in the back yard. Once the new house is complete and rented out I will have increased the value of the property and turned it from negatively geared to positively geared (after interest and all expenses). There will be depreciation on both houses which (after tax) will result in even better overall cash flow. Personally I think this is a viable strategy where the existing dwelling is worthwhile retaining in the medium term.