From Zero to $5.4 Million: My Journey to 6 Properties and key lessons

In the current environment most investors as you move to the 3rd 4th 5th property will be using 3rd tiers such as Pepper and Liberty which rely on actual repayments instead of the usual assessment rate. IO will help with serviceability and P&I would kill it in these scenarios

 

Liberty use actuals to 80% LVR only. You still have to be able to pass servicing to extract equity for the other 20% + stamps at your non Liberty lender .
Liberty don't do construction loans so any purchase where they are being used for serviceability will need be an established dwelling - so it's 20% + full stamps , not 20% + land stamps only
Liberty charge a premium where you have 3 properties or more- they consider you a professional investor
Liberty also charge an IO premium. So it's pricey to access that servicing calc beyond property #2
In other words, if you are in need of Liberty for serviceability at property 3 or beyond, investors really ought to be factoring in a higher yielding property or they are simply driving into a very deep cul - de- sac with no way to get out if any of their circumstances change negatively , other than to sell. They might get lucky and APRA might remove buffers , I guess... but unlikely. They also might get lucky with 150-200bpts RBA reduction, but if they are relying on that as their redundancy against P&I in 5 years , their position is precarious.

If you do get that L:iberty loan, watch out when the non liberty loans reach their IO expiry too... say hello to P&I my friend , on those loans ... or be prepared to roll them to a much higher rate at Liberty at that point , to retain IO. But here's where you may run into the 1.5 MIL max exposure limits at LIberty ....

Like I said, the LIberty solution carries a high risk of reaching a cul-de-sac ( nice way of saying dead end ) for a variety of reasons , meaning you may not be able to reverse out of or manouevre - which is why purchasing handsome yields and paying down some debt is extremely valuable

Pepper don't use actuals and haven't for years . Actuals + 20%

So while I would concede that under some very limited and very specific circumstances IO will assist serviceability at a very limited range of lenders , IO does not help with serviceability in the overwhelming majority of cases at the overwhelming majority of lenders , and certainly punishes /diminishes borrowing capacity almost everywhere. But it certainly does help with cash flow and holding costs .... and that's where it has great appeal, and why there is often a point at which people have to decide how they move forward... do they convert loans to P&I to start reducing debt ( albeit slowly) but to ganin some modest advantages on serviceability, and accept higher holding costs ..... or not? .

As I indicated above, IMHO the only really sound/ justifiable reason to be expanding a portfolio using these lenders and these policies is where strong yields are involved. Seems crazy to use them for the purchase of low/vanilla yields when you know the cash flow will be hugely negative even on IO because of the heavy loading, and where you know the opportunity to avoid P&I in 5 years is extremely remote because serviceability today only works at one lender, and you're already there. But it can be suitable for some situations, yes. For example, lots of my clients will use Liberty to squeeze one or sometimes two more Dual Occ's. They may have 3 or 4 or 5 already and have run out of capacity elsewhere, but want to add to their portfolio. In these circumstances the Liberty policy may be suitable because the product we build is a double income dwelling so the higher costs of the Liberty product can be justified even if they revert to P&I. And we are fortunate enough to be able to can carry some deals on a single contract to get around the construction limitations, so this sort of thing can work for the right clients. But I would be strongly discouraging clients from pursuing this for a single income dwelling offering vanilla yields - it is fraught with fragility and as I said, it can be a road to nowhere and there is no obvious refinance/exit strategy when the IO period expires. You are entirely reliant on a change in assessment rates or a big reduction in cash rates or a big pay rise to be able to avoid a hard P&I landing and a potentially involuntary /forced sale of some assets .

No matter how you cut it , all roads lead to SPARTA, and even the limited options to defeat it , at lenders like Liberty which allow for some extra leverage, have their strict limitations. It's why I asked @Justin_Z where/whether/at what point he thought the two things conflict ... IO and serviceability

 

Hey mate, appreciate your input - I love these types of discussions. I can see your strategy has done well for you, good on ya.

With the current rate environment, the strategy remains the same. There are investors who are holding back because the rates are too high in the current environment - 100%. That's okay, everyone has a different risk profile.

However, what tends to happen is that if/when rates get cut, or credit eases, asset prices generally start increasing.

So those who have bought at these current rates will be experiencing some cashflow pain in the short term, but likely better gains longer term. I've seen plenty of investors take on rates at 7.5%-8%, bought in Perth and made good 6 figure growth.

And then there are also plenty who sit on the sideline focusing on the rates. For the ones who made the leap, if cashflow becomes too much of a strain and they sell in 3-5 years, would've still made more by picking 1 or 2 additional properties vs 0.

I'm not against debt reduction in principle, it's why I see savvy investors target good assets with good yields to mitigate some of the risk.
My personal view point is that it depends on where that investors journey is at.

In the acquisition phase, the focus should be on maximising an asset base. Trying to reduce debt with P&I, or focusing on yield generating strategies isn't as effective as buying quality assets with IO and letting compound growth, leverage and inflation do the heavy lifting. And as mentioned before by @HonestShiba , P&I ends up lowering borrowing servicing vs IO with certain investment friendly lenders.

The caveat to this strategy is that income needs to continue to increase over time to allow IO extensions. This is a good fit for those starting out in their 20s and 30s, as generally speaking income tends to grow significantly until 40s and 50s for most corporate careers. Not a great fit if you've maxed out income, or planning on reducing income or retiring.

Overall, I've observed that by the time investors start using the 2nd/3rd tiers, they already have quite a few properties so have a good understanding of how the game works, have seen equity gains and have buffers in place to absorb short term cashflow strains so this strategy suits them.

Yep that's a good point, and it's why a specific lender selection is required beyond 1st tiers to achieve this type of strategy. It's why if someone sticks with tier 1 lender, I feel they won't be able to reach their investment potential compared to using a combination of tiers - assuming income and time frame is like for like.

Ultimately there's many ways to skin a cat, that's good because people can choose what's better for their goals and risk profile.

 

@Justin_Z how will your strategy change if negative gearing is abolished?

Housing affordability: Greens MP Max Chandler-Mather pushes for negative gearing changes, issue set to dominate the next election

I still think it’s a political suicide if Labor does this but you never know.

 

All of this I understand very well . After all, I have only been in lending for 20+ years
And with a 23 property portfolio, I better, or I need to find a new hobby !!!
Just trying to provoke discussion because I feel most readers here just don't get how serviceability works...at all.
You've done very very well for a post APRA portfolio build. Congratulations.

 

As far as I'm aware of there's no specifics released about this, it's one of those maybe it'll happen, maybe it won't things. I tend to focus on what's inside my control and stick with one of the lessons I posted earlier - time in the market. Keep holding assets until your exit phase.

If negative gearing changes do occur, which is a pretty big if, I'll have a look at the specifics and then make a plan when there's certainty.

I remember QLD gov passing legislation around land tax changes couple years back, which would've impacted myself and a lot of other multi property holders. A lot jumped the gun and sold. Don't blame them, the fear around it was substantial.

They reversed the changes less than a year later, and now Brisbane seems to be humming along again.

 

I would expect that should there be any changes to NG, they would be grandfathered. At least, that was the proposal in 2019.

 

Inspirational Justin!!
Having dealt with you recently your transparency is appreciated. Having not purchased any properties for quite some time (due to living/working overseas which enabled us to pay off our PPOR) you've showed us how to correctly structure our finance to enable another 2 X IP purchases taking our portfolio to 5 properties, not to mention explaining our potential for the additional 2 properties.

It certainly makes a difference having a broker who has skin in the game compared to the franchise type Mortgage Choice broker I used in the early days. Fortunately I had a mentor back in those days (Rixter from Somersoft forums for those that remember) so we were able to buy decent properties in another state with some guidance.

The only question is where to buy next?
Madora bay looking promising...

Thanks again for sharing your story and look forward to accelerating our portfolio.

M&P

 

Hervey has a lovely Bay , too

 

Fantastic read @Justin_Z . Thanks for sharing.

 

Hi @Justin_Z - thank you for sharing - I've learnt a lot from your story, your strategy was very well summarised as well as the lessons you've learnt along the way. It is very much appreciated!

It's good to see that you've started off with just investment properties with a lower price before eventually getting your PPOR. There is no way that my then and even current serviceability would enable me to buy anything in Sydney besidesthe cheapest of apartments- so I've just bought IPs in other states - but obviously a PPOR will be something that I'll need to think about in the future.

So I was wondering if you were able to get your Sydney property due to a massive increase in income or whether you just got a loan on a much smaller LVR while using the equity from your existing 3 IPs?

Also the fact that you were able to still continue to buy more IPs after the PPOR as I feel like a PPOR could be a massive setback in acquiring more IPs.

 

Thanks for sharing. You got into the WA market at a very good time.

 

Great thinking regarding looking outside the area you live in for investments, I'm sure it'll pay off long term @FatElephant

My income definitely increased compared to the start of the journey, I wouldn't say multiples though - it's what you'd typically expect in an allied health PAYG role in mid management.

We didn't cashout equity from IPs for the OO, the biggest help was the rates dropping to where they did and then taking action.

After the OO purchase, I was tapped out on borrowing with 1st tiers. Luckily there's lenders after that. Essentially with 2nd tiers you pay more in interest, but allowed leverage into 2 more IPs.

2nd tiers aren't for everyone but for serious investors can play a crucial piece of the puzzle.

The way I think about it is, sure I pay let's say $5k extra in interest per year compared to 1st tier, but if I make $50k in growth - well that's the cost of business.

Cheers, when you invest long enough and chat to other investors - you'd get the timing right once in a while with some luck and due diligence.

The information is all out there (or in here at PropertyChat), it's just whether an investor is willing to take action or not.

I see too many often sitting on sidelines waiting for the perfect time. The fact is, there is no perfect time.

 

Hey Justin, given prices have moved upwards over time and looking at your past purchases, what's the sweet spot price range for an IP for you today?

 

Thank you so much for sharing! Yes I've just refinanced one of my properties back to first tier lenders (started off in 2nd tier as well) as soon as I was able to so I could leave some space for future acquisitions. Interest rates would probably be cyclical so when the time comes it's probably about taking the opportunity or maybe a combination of that + some equity from existing properties.

 

This is a common question, and as cliche as it sounds it really comes back to:

• your own finances & goals
• how good the numbers are for the deal
• risk profile

I've seen some clients with lower borrowing capacity and/or deposit make established house purchases in the low 3s renting $450, and others in the low 6s renting at 550-$600/week. Capital gains wise is similar as a %.

On the flip side, I've seen clients with strong income ($500k+) decide to buy a blue chip house in Sydney, yielding 2% but it doesn't bother them because their PPOR is fully offset.

My own strategy has been to buy something where the numbers make sense, the market makes sense, so I'd be looking around the $400k - $600k mark.

 

Great story thanks for sharing. Why did u sell IP1?

 

First timer and didn't know there was a property chat forum existed. Own a PPOR with 69% LVR with a tier 1 bank... And now looking to buy our first investment property...

@Justin_Z amazing growth journey and many thanks for sharing your experience.

 

I have been really keen to do this but don't know the best way to do this. What approach did you follow ?

 

There's a typo in Day 30... should be $5,368,709.12.

p.s. Day 50 is around $5.6 trillion.