how to borrow more / unlimted finance

Clint wrote:

I wanted to throw another aspect to Coogee’s opinion on +VE cashflow property. I have sold property with a 33% increase in capital based on a buying price vs my end selling price within 15 months(ownership) due to cashflow not due solely to capital growth. There is a strong demand in market for properties that yield high so if you can build in the yield from creative ideas you can unlock capital due to the demand for +VE cashflow properties. I have done this and I use rental yields to determine the value of my properties and the market demand for my properties. I think this is a strong way (not the only way) to build capital if you are willing to sell because I know that in this current market you can sell 7% rental yield properties all day long almost with complete disregard to the quality of the property.

If you can build value into a property to create a 8-9% yield you will be able to cash in on the value difference between a 6.5-7% and 8-9% yielding property upon sale in market. Valuers will never accept this formula for identifying bank valuations but market values seem to support the sale of a 6.5-7% rental yield on the basis the property is in a low risk area ie; cities and surrounding suburbs.

everyone may have their goal for rental yield, so what is the average that you aim for?
and when you have a high yield rental property, is it wise to sell it which you would be selling the goose laying golden eggs?

DeanCollins wrote:

My thoughts exactly Charlie……if you have an 8-9% yielding apartment (do they even get that high in Sydney these days…..or are you calculating it pre any type of expenses……) then why on earth would you sell it.

without seeing how someone calculates yield, it’s hard to compare. I’ve seen some that has yield as what percentage is above the mortgage payment, while some has yield as after all expenses related to the property. everyone’s got to be on the same page, to be talking about the same thing.

we have few properties, and we’re trying to get good rental yield for each of them but quiet difficult to do so. it appeared that yield is very relative to location where the property is. very hard to get your property occupy at $500 per week when the average in that property’s location is $250 per week.

I still think it’s wise to ride your profit and cut your loss, in anything you do in life if the objective is to be ahead of the wave.

DeanCollins wrote:

My thoughts exactly Charlie……if you have an 8-9% yielding apartment (do they even get that high in Sydney these days…..or are you calculating it pre any type of expenses……) then why on earth would you sell it.

I haven’t been able to find cookie cut ready to go 8-9% yielding properties but I have created them from obtaining new DAs, new development ie; villas and granny flat constructions previous to most of the market trying to also do Granny Flats which admittedly has slowed down the Granny Flat strategy for me. I haven’t found apartments to achieve this.

everyone may have their goal for rental yield, so what is the average that you aim for?
and when you have a high yield rental property, is it wise to sell it which you would be selling the goose laying golden eggs?
[/quote]

Using a metaphor for the Golden Goose is ok but I think it simplifies the situation a bit too much. What I like to do when managing my portfolio is run a “Cash on Cash” return analysis along with “Available Capital on Cash” return analysis. This allows me to assess whether a “Golden Goose” is worth selling. Although the property is yielding just on 9% at the moment ie; $500 rent PW on a purchase price of $290,000 in an area with access to train line and the city I can take the capital that someone would pay for that property and turn that rent into $1400 PW by purchasing two new properties that are yielding 8%+.

I know these numbers might sound high balled but they are not. They are banked numbers.

The point that I raise with these numbers is that this thread has focused very much on Capital vs Cashflow but I believe that capital follows cashflow and if you can get your cashflow sorted on property than you will be able to raise the capital either through bank valuations and drawing down on the equity or through the sale of a property if that bank valuation has a large discrepancy between the market value and valuer’s analysis.

Great to get feedback on that thinking though and whether investors agree or disagree. I know that there are many other factors that influence capital growth but I believe there is a stronger correlation between capital and cashflow than sometimes is acknowledged.

CharlieX wrote:

I would agreed that capital growth is long term and cashflow is short term.
valuation is merely a value at a specific point in time, and influence by those properties in the surrounding of your property.

at the end of the day, how much a buyer is willing to pay is the value of the property to that buyer. it becomes a subjective variable.

personally, I would keep good cashflow properties.

I quite like this way of thinking. Capital growth is definitely where the wealth comes from.

Cashflow to keep the whole train on the rails though. This is why outer suburbs of Brisbane and Adelaide are handy atm, because they have both :)

Net Yield + Capital Growth = Return. Both are important but not equally probable.

You could get a 10% return in either of the following scenarios:

1. Yield: 5% and Cap: 5%
2. Yield: 6% and Cap: 4%
3. Yield: 4% and Cap: 6%
4. Yield: 8% and Cap: 2%
5. Yield: 2% and Cap: 8%
6. Yield: 10% and Cap: 0%
7. Yield: 0% and Cap: 10%

One thing we know for sure from day one is the Net Yield of the property (not exactly but close enough).

Capital growth on the other hand is just an estimation. Could be 10%, 7%, 0% and even in some cases -5%. Most of us like to think that our property will grow annually by at least 7% if not more. That’s normal. We are only human. We expect +7% capital growth and disregard the fact that it could end up being 0%, when we should be hoping for +7% but be prepared for 0%.

However it would be common sense to focus on what we know and what we can control to maximize our return and minimize our risk. We have limited knowledge and most importantly no control whatsoever over capital growth (renovations/improvements/additions can result in an instant boost of equity but they stop there and don’t continue annually and require more funding to begin with) so why place all our eggs in that basket.

REGARDING BANKS AND LENDING
A bank’s job is to manage risk and they are good at it (excluding US banks… :) maybe they got better now). Banks are better at managing risk than us. So if they don’t want to lend you money that kind of tells you that you are too risky for them, based on their lending policies. Of course you can go to another lender with less stricter lending policies, and increase your risk, but at a certain point that strategy will stop.

REGARDING LONG TERM INVESTORS LIKE STEVE
Investors like Steve accumulated dozens of properties, within a few years, 20 years ago when the property market was different. Now competition among investors is higher (who follow those strategies) and the economy and government policies are different. Those strategies won’t get you the same number of properties in today’s market.

Cheers
Andrew

@corey, yep totally agree, when it comes to cashflow calculations I totally ignore capital growth until its realized.

Cash flow certainly can be a pre-cursor to capital growth, but I wouldn’t say it’s always a direct progression. Some areas show strong CF for a reason, because capital growth is in the dives indefinitely (buying in Timbuktu with no growth factors).

As always, the profit is in changing demographics – increasing buyer/seller ratio, increasing owner occupier percentages, zoning changes etc.

Hi Coogee,

Going back to the original question….
A few things about your opening post.

1. Trust will actually reduce your borrowing capacity ( as you cant use negative gearing) – but def a vehicle for asset protection/ income diversification and land tax etc..

2. The good old “foreign” investment trick is a fraud in most cases…pretty much it was a “westpac” policy….any foreign income they will take from a simple letter- one of the dumbest policy! but hey westpac probably made Billions writing foreign investment loans…this policy has now changed only as of Oct 0214.

3. Low doc also won’t work as your not self employed ( i presume?)

——a few simple way to increase or really to MAX your borrowing capacity—-

In order of importance.

1. Choosing the right lender to use a at the right time and keeping the “easier lenders” LAST – Ie NAB/ Macquaire bank/ AMP etc…

2. Using up the foundation lenders early on – ie ANZ/ St George/ Westpac/ CBA

3. Using high LVR early on and sticking with low LVR for your 13,14,15th property etc…

4. Using the right loan structure – Ie Interest only and know WHEN TO FIX…..fixing can also increase your borrowing BUT only for certain lender and normally it has to be over 3-5 years.

5. Reduce “bad” debt – ie CC limits/ HECS / Car loan

6. Increase income ( not easy)

7. Increase rent ( also not easy)

8. Buy with the right yield and property type to increase servicing ( change your buy strategy based on your position…ie for me every time i buy a good capital growth property i would buy 3 rental yield property to support the lost…effectively making my portfolio “0” effect = unlimited borrowing)

9. For something a bit more creative – Invest in Insurance bonds the income can be used in servicing ( taking on some risk though)

10. for something with a LOT more creative – Flip a property/ renovate and sell – some banks will also take on this income

11. Enjoy the experience and ride :)

• This reply was modified 9 years, 8 months ago by  Mick C. Reason: add

Interesting discussion. I would like to think there is other ways to borrow more…..apart from being shonky.

Banks are a pain in the bum especially with serviceability. You can present a good case to your broker with the worst case scenario and you will still get rejected under the banks ‘serviceability rules’. And it doesn’t seem to matter if the property is to be bought 50k less than market value.

Are there private loaners out there who are willing to look at the whole picture?

Hmm. I remember that one next time my work colleagues ask me for lunch money. They will probably resort to being a different entity.