Hi All
My theory – your thoughts
Buy properties in high growth areas. Yes, near beach, 15-20 kms from cbd in cities etc.
Yes, they may be or probably are negative geared. You want growth. And yes, you need a job to support this. Buy traditional homes or units. Not inner city stuff.
Once the first goes up in value – use the equity to buy next property, then the next etc.
Sure – buy a property in a rural area that is positive geared – just see what growth, if any, you get and see if the management hassles are worth it. For mine, its not worth my time and the management hassles of having rural properties, even if they are positive geared.
What if your just bought a PPOR? How do you start buying a negative geared investment property? Just pump what you can into your PPOR. Don’t worry too much about paying the PPOR off. Buy an investment property (when you can affford it and use interest only on a fixed 5 year term) in a growth area and before you know the equity you have in the investment property will more than cover your existing mortgage on your PPOR. Buy properties at about the $250k to $300k.
Then eventually get a portfolio of about $1m. If property goes up at an average rate of 8% a year, then you will make $80k a year capital gain for just managing your properties. This is a heap better than looking at shares, managed funds etc. Don’t even look at them. Feather your own nest not brokers and financial advisors.
That’s what I am doing. I am not there yet, but I have started (I started slowly about 5 yrs ago) and that’s my medium term aim. Sure its not easy to start now. You may have missed the boat, but there will be another boat. Save cash to pay off your PPOR. But buy a property in a growth area. This means in a major city.
This does not work for all – but it will work for most people as they have an income.
Cheers
Andrew
Andrew, interesting theory, and one which I have followed to a certain extent. But now I find I don’t want to work anymore, and so I need some positive cashflow properties that will enable me to not work.
If this means I have to go rural and accept no CG, then that’s fine, cos I have the other properties which are well located and will grow.
Cheers
MelThis is lightyears from what I do.
Could come unstuck buying properties in Melb or Sydney right now this is common knowledge.
I would even be suspect about inner Brisbane right now.
North of Brisbane is going to explode in the future, plenty of opportunities, why?….the weather and the lifestyle and the room to breathe.
All other areas will come second in the near future imo.Hi Yack,
Purchasing in both areas, is not bad and allows for diversity. If you are not planning to retire. It would better to use your +ve cashflow properties as a product of financial management.
In doing so, you can have more finance to control a larger volume of properties.
cheers,
s.i.sHi Melbear
You sound like you are about 5 years ahead of me. I see myself working another 5 years then I would like to think most of the properties are looking after themselves, then I can focus on more positive geared ones and work more like part time. I have a young family with two young kids, so I still need a steady income/job.
But to get started, I need my job and a portfolio of high quality properties to support my lifestyle. Then later, in better buying conditions, I can look for more positive geared properties.
Cheers
Andrew
That’s probably very true Andrew – I hope the next boom kicks in again sooner than we all think, so that the equity can skyrocket and move your plans ahead a bit.
Cheers
Melyack said:
“Buy properties at about the $250k to $300k.”
Yack- who can afford that? Well, some people on here can- but certainly not me!
I think we have to look at strategies that fit into our budgets. I can dream about buying 4 X 250k places, but the reality is- I can’t afford it. And I’m earning about 40-50% more than the median wage in sydney. Still… have to be realistic about what’s possible and what isn’t.
Perhaps that’s why people are purchasing the cheapest property in Australia- not because they want to buy a 45k place- but because that’s all they can afford.
kay henry
Hi Yack
Your theory is fine for anyone interested in CG. Personally we invest for cashflow as we have a ten year plan (now 9) that will see my better half having the choice whether to work or not.
We do have a neg geared IP that is a huge thorn in my ass[
], I hate folking out the difference … but that is just my 2 cents []. It’s going up for sale this month.[]Good luck with your plan I hope you reach on time or sooner.
I am with Kay, 250k is a lot of money to find deposits for.
Kay just curios about what type of work that you do … Do you mind sharing that info?
Cheers
Leigh K[]Carve your own path and lead the way …
I work in policy, Leigh.
kay henry
Sorry what does that mean Kay.
Cheers
Leigh K[]Carve your own path and lead the way …
Leigh, I would think that a CG focussed property, even if negatively geared, that achieves its required CG, could then be sold, pay down some of the loans you have, or be used to fund further positive IPs, thus reducing a 10 year plan by several years.
Especially if you had bought said CG focussed property 1-2 years ago.
Cheers
MelLeigh,
It means I work in an area of policy. I research and I consult and I write policy and respond to existing policy.
Perhaps we should have a separate topic asking people what jobs they do?
kay henry
I agree with Yack that this is a good strategy. I would be a bit wary of property in regional areas at the moment as there may not be much capital gain in the near future (speculation!). It is the capital growth that makes people rich, not the income.
Terryw
Discover Home Loans
North Sydney
[email protected]Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Terry I disagree some regional areas are going through some major roadworks and where they are placed makes them the perfect investment imo for CG or CF.
Suppose the negative gearing works at your current income level and while interest rates are low and while property is hot, but what if one, or worse, a combination of the above falter? Don’t forget that property is cyclical, and after a boom a bust is sure to happen. In a situation where the bulk of one’s investments are negatively geared all one’s equity could be wiped out fairly quickly. And that’s when the wiley old foxes that have been accumulating cash suddenly start buying up all the foreclosures at bargain prices. Just a thought!
Cheers, Julian.Another problem is, depending on how much cash you have and are able to subsidice, your are limited to the amount of -ve geared properties you can purchase, if the tables turn and your negative geared properties market value drops, you could be in some strife.
Having diversity, allows you to minimise and prepare/cater a safety net for such a position or risk taken.
cheers,
s.i.sHi
My plan is not to get $1m of property now. I am talking about over a period time (say 5-7 yrs) while you are still working the normal job.
As the first property becomes cash flow positive you purchase another negative geared property and as that increases in value you buy another etc, etc.
You have to start with the first one at say $250k, then once its positively geared you go onto the next. Yes, it takes time. But the growth will make it worth while.
You always need to consolidate, before you buy the next property. To allow for rental vacancies and increased interest rates.
All I’m saying over the long term, rural property is not worth the effort unless its a holiday area for you and you go there alot.
I currently have a property 20 mins away (Frankston) that I cannot rent. It needs a new kitchen, landscaping, painting and new doors. Once this work is completed it will find a tenant no problem. I dont have time for do this on a rural property worth $45k. But one day you will need too.
This place has already doubled, and there are great things going on there eg. Marina, central shopping centre, new theatre. Contrary to what Sam Newman (The Footy Show) reckons Frankston has a alot going for it. Even if the markets starts to tank, this area wont.
But that could be another post.
Cheers
Andrew
Growth vs yield debate flares up again ; )
It all depends on what you want. High long-term wealth or to replace your work income with passive income as soon as possible.
Instead of having an aim of owning $X m of properties, I prefer to have rental income exceeding $X k/year or 50% of total income (work and non-work).
To do this requires me to buy sufficient numbers of properties to do this. While it will certainly not be 130, one or two (such as which most negative gearers own) is not enough either!
So the issue is how to finance all your purchases. The trick is to be able to afford the purchase of sufficient numbers of properties (to provide the required income) while keeping debt and serviceability ratios under control.
For me on a somewhat below average wage, a heavy negative gearing strategy would be one of ‘pay and pray’. I’d have difficulties with getting finance for more than a couple of properties as serviceabilty and overall debt could be a concern. Also paying out to support properties would reduce investments in other areas and tax deductions are less (30 vs 47%).
A very positive approach based on cheap properties would allow the purchase of more properties generating higher income. Serviceability would be good, but LVR would be high, and with little cap growth it might take a while for this to drop. However the very cheapest properties are in tinpot towns without infrastructure like tradesmen and PMs and the properties themselves would not necessarily be good quality, well-located or highly tenantable.
I have opted for a strategy between both extremes, but probably two-thirds towards the positive model with yields around 8-9%, so they are close to neutral. So far for me this has meant well-located highly liveable villas or duplexes in regional cities that are below median price and were built in the last 20 years. Huge subsidies are not required, but if interest rates increase then that can be handled.
I agree that both growth and yield can help the portfolio grow. This will influence where I plan to buy next. If I want a bit more cashflow to prepare for interest rate increases, I might try for 9.5-10% yield next time (particulary as my last only gives 8.3% but in my view was underpriced and has some growth prospects).
Regards, Peter
Hi Yack,
$250k property is alot of money to service, if the property is currently negative geared. It could be a very long time before its +ve geared too. In doing so you could limit yourself and miss out on many potential buys.
Its good to see that you have a strategy in mind, though i do feel you are limiting your self.
cheers.
s.i.sHi Peter / All
I totally agree. You need both (growth and yield). I just dont like reading posts about people focusing only on cash flow positive rural properties. These properties have taken a hell of a long time to appreciate. Just because they have in the past two years does not mean they will in the future.
Who wants the hassle of 3-4 hour drives and fixing problems over the phone, for just a few $000 a year.
I would rather enjoy a capital return of $20k on a $250k property that returns an average 8% capital gain over the long term.
I dont want ten properties that gives me a $2k return with limited growth potential from each property
Cheers
Andrew
], I hate folking out the difference … but that is just my 2 cents [
]. It’s going up for sale this month.[
]
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