Thoughts on Investment Strategies

Lance, think about why you are investing in property and translate that into goals (in $ terms), then look at your current financial situation and see what kind of strategy may suit you best. If you are a high income earner with a heavy tax burden, buying high growth negative gearing property may a good place to begin. Alternatively, if you have less income and don't want to much of a cashflow burden on a monthly basis indeed look for more cashflow oriented properties. Despite what the majority says, you can (with a lot of work) find cashflow neutral/positive property which has good growth prospects especially in the current environment of lower interest rates, higher rental yields and a soft market.

If you go pure growth you are likely to end up with so much negative cashflow that you soon hit a wall and can't expand your portfolio, if on the otherhand you go pure positive cashflow, you are likely to end up with a much larger number of properties to achieve a similar equity, this can be a strain in terms of management.

I feel it would be best to get a couple of growth properties first so that you can later on leverage of the equity growth and then invest in more income focussed properties to balance your portfolio, but again, it all depends on your actual circumstances and personal views.

buying income producing property may help you get a few more quicker, but if there is not capital growth, then there is no point in my opinion.  making $50 or even $200 per month is going to take a lot of properties for you to retire on.

But who knows if or when the capital growth will come back.

Capital growth is what makes you rich. It doesn't really matter how you get it, but the more you get and the quicker you get it the better!

Freelance

You are assuming that capital growth property is negative geared – this ain't always the case. The ideal proeprty would be one that is positive geared, in a area with high growth potential and one which can be value added (reno, sub-divided, extra room added etc).

This is our strategy…

First: realise the equity in your home (if you own one) by refinancing as much as the bank will let you and take the hit of lender’s insurance. Split your loan into two – one for your home repayments and the other for your investments. Use the investment portion to pay for deposits, stamp duty, repayment shortfalls etc. As you pay off your home mortgage, you can rebalance the credit over to your investment mortgage. You can pay the rent and tax credits into your home mortgage to achieve this faster than by just paying your income into your own mortgage.

Second: use your available funds to purchase structurally sound but internally outdated/rundown properties as close to the CBD as you can with the largest loan the banks will give you (currently about 95% with lender’s insurance). Depending on your budget, you may have to buy apartments which, in general, don’t get as much capital growth as houses but this is not always the case as you get in towards the CBD. After all, there are more people who can afford apartments in the city than can afford houses and it is the demand for your property that creates its capital growth.

Then renovate/refurbish them. It depends on what you’ve bought as to how much you need to spend on renovations. It might just be a lick of paint and a new set of carpets or it might be a new kitchen and bathroom. We use a buyer’s agent to find and purchase our properties and we use a renovations company to do the renovations. That way, we spend next to no effort on building our portfolio.

We have only just started investing but, with this strategy, we have managed to buy 3 properties in the last 3 months that have rental yields 4.9%, 5.2% and 5.2%, respectively. They all have long-term capital growth of 10%+ pa.

If you get 5% from rent and, after costs, keep 4% then the shortfall is 1% against the current rates of about 5%. In terms of tax credit, you can add about 1% as depreciation costs making your theoretical shortfall 2%. If you’re in the 40% tax bracket, you’ll get a rebate of 0.8%. If your actual (rather than theoretical) shortfall is 1% and your rebate is 0.8% then your post-rebate shortfall is 0.2%. On $1,000,000 loan, that represents a shortfall of $2,000! In an average year (which it is certainly not this year!), you’ll make 10% capital growth on your portfolio. On $1,000,000 of property the capital growth would therefore be $100,000! Not a bad return!

As you pay your income, rent and tax credits into your home mortgage and rebalance the credit into your investment fund, you’ll quickly be able to purchase more and more properties. Eventually, you’ll have to refinance your portfolio and then you can use this to purchase more. The more properties you have, the more capital growth you get and the more you can buy!

A 10 year plan will easily earn you financial freedom if you get your strategy right.

NEVER be afraid to pay for good advice. Mine is free though! Good luck.

Of course. The renovations company is actually a subsidiary of the buyers agency, as far as I know. At least they occupy the same offices in Melbourne. The buyers agency is called “Metropole” and the renovations company is called “Central Renovations”. I know for a fact that Metropole has an office in Sydney too so you could give them a try. They offer free property briefings on the weekends.

Michael Yardney, the founder of Metropole, also runs seminars. Although there is valuable information to be found in these seminars, I have found they have a fair amount of marketing in them and I object to paying for advertising! In particular, the one I went to last year had Ed Chan (of Chan & Naylor, a big accounting firm) trying to sell his Property Investment Trusts which are hybrid trusts by another name. My belief is that these are the last things you want to have anything to do with. There are very few lenders who will lend to hybrid trusts at the moment and I can’t see that improving. If you are intending to grow as big as we are, then I would consider getting your first couple of properties in your own name(s) as the flexibility from this is great. You can get the best LVRs and the widest number of lenders interested in you as an individual whilst maintaining the negative gearing benefits but these advantages deteriorate or disappear with trusts.

Make sure that you get a really good strategist to sort out all your finance first though. I don’t know anyone in Sydney who’ll do this for you but I can give you our Melbourne guy.