invest for cashflows or capital gains

[NovInvestor]

My strategy:
1) Buy 10 B & H before the boom
2) Buy 3 home-type properties during or at start of boom
3) sell 3 home-type properties at height of boom
4) use profit to pay off the loan on the 10 B & H
5) live off the income & quit day job

My only criteria for the 10 B & H is they must be cash flow positive or at least neutral from day 1, AND provide equity after reno so that I can refinance quickly and buy my next one, and the cash flow will limits my risk if I loose my day job at anytime during the journey.

This is my 10 year plan anyways, and I'm only 4 months into it.

Some of you will say that I'm investing for capital gains, and yes true, but as long as inflation exists, my plan should work.

As to Auckland Investor, what is your goal?

[auckland investor]

Mr Nov Investor,

My goals is to live off passive income from my real estate. I hear quote from Robert Kiyosaki say invest for cashflow like investing in dairy cow. You get lots of milk money. Invest in beef cow you kill cow to get quick money but the next day you have to buy a new smaller cow.

I like cashflow milk cow better. I guess that why they call investment "cash cow"

[auckland investor]

What is 3 home type property?

[Shane D]

My strategy:
1) Buy 10 B & H before the boom
2) Buy 3 home-type properties during or at start of boom
3) sell 3 home-type properties at height of boom
4) use profit to pay off the loan on the 10 B & H
5) live off the income & quit day job

NovInvestor,

I am curious why you decided on 10 buy and holds. If we take the average rent on a 3bedroom at $400..that mean you will have $4,000 income a week or $200,000 a year conservatively. Take off taxes and runnnig costs (maintanance, insurance PM fees) you will probably have $120,000 in your hand.

Do you feel you need that much because you want to live the high life? Do you live like this now?

Just curious. As I am putting a similar plan together and I think I would be happy grossing $3000 a week. I plan to acheive this goal with 4 x Home and Income houses.

Shane

[NovInvestor]

Home type property:

1) 3 bedrooms
2) 2 bathrooms (add one during reno if possible, not essential, but must have at least 1)
3) clean section (full preferred, but half will do) with good utilisation & privacy
4) with good street appeal

That's all

[NovInvestor]

To Shane:

10 2 brm units in Auckland City (I'm a novice, so I'm only targeting basic rentals that are plenty on the market, and 3 brm in Auckland City is too expensive to be even cash flow even, given that interest rates will rise again next year)

Each rents for say $300 (conservative)

so if mortgage is paid out, then $3,000 a week gross income

That will be enough to provide for:
1) my wife
2) my future kid(s)
3) 4 sets of parents
4) my aunts and uncles etc (in case of financial & health emergencies)

so yeah $3000 a week (today's nz dollars) should do it...

My 10 year plan is only to pay off half the mortgage ($1 million) on the 10 B & H

3 home type properties around $350k each, and when it doubles = $1M by the time I sell.

That's a rough plan for a start anyways.

I'm 2/10 after 4 months, so 8 in the next 2 years should be achievable. If the boom comes sooner then I have to be more aggressive, or content with less than 10, and move to buy the flip homes quicker.

But then again, when the boom starts it's easier to buy the B & H initially anyways.

PS: No my wife and I do not live on a high life, not before, not now, but hopefully in the future =)

[Shane D]

To Shane:

10 2 brm units in Auckland City

Each rents for say $300 (conservative)

so if mortgage is paid out, then $3,000 a week gross income

NovInvestor

Thanks for sharing your strategy. Actually your desired outcome is the same as me i.e $3,000 income a week. Its just we are working on different investing strategies to get there.

I like Home and Incomes in Auckland because of the yeilds possible. My plan is to have 4 in the portfolio. I have one now and working on the 2nd as we speak :-).

Thanks again for sharing.

Shane

[Shane D]

I'm 2/10 after 4 months, so 8 in the next 2 years should be achievable. If the boom comes sooner then I have to be more aggressive, or content with less than 10, and move to buy the flip homes quicker.

NovInvestor

- Are you a student of Ron Hoy Fong? You seem to be following a similar strategy.

- Do you usually buy 2bdrm units and do-up? Redecorate?

- Are you finding any difficulties renting units in these difficult economic times? I remember Olly Newman mentioning in his book "the day the bubble bursts" that units tenancies usually suffer in an economic downturn as tenants look to crowd into bigger properties (more people per property).

Thanks again for your time.

Shane

[Pegasus]

Hi Nov Investor and Shane
I am curious as to the yeilds you have both managed to get on the properties bought recently?
I am experienced in trading but yet to buy an IP as finding it hard to see the point with only a break even type yeild so would be interested to hear more about your strategies
thnx
Pegasus

[Shane D]

8% yield goal

Pegasus,

I am a fan of Dean Letfus' investing strategy. 8% yield on good solid family homes, the general rule. I like LEGAL home and incomes for the higher yields. This allows for a truely cashflow positive property at 100% finance even with PM fee, insurance, rates, factored in.

I bought a home and income this year in Papatoetoe Manukau yielding 8.8% and are looking looking at building a new H&I that will come under my 8% yield target but i figure its still a good strategy as i am looking at a 20 yr buy and hold so the mainstanance cost savings over 20yrs on a new build should be attractive.

Shane

[ENP]

So Shane,

With the 8% gross yields, that would mean you would have to put new cash deposits in everytime?

You wouldn't be able to recycle the equity into the next place because the banks only take into account 75% of the rental income.

Is that right?

[NovInvestor]

Hi Shane & Pegasus

Yes I'm a student of Ron Hoy Fong, and Ron is by far the best property coach I have come across. Ron comes with me when I look at houses, when I negotiate with the agent, before and during renovation, and anytime I want in between. He's dedication is much better than other 'mentors' I have known over the years.

I call Ron a property coach because Ron is different compared to all the other mentors who just sit with you once a month.

My 1st 2 brm is 8.7% yield (1 brm turned into 2 brm), and my 2nd is only 7.4%.

Both are fully renovated, and both were purchased about 15-20% below QV, and should have little problem to get refinanced and get all my borrowed deposit + reno cost back.

Sometimes you gotta sacrifice the yield a little to get a property for nothing but time invested, like my second unit.

If I can get same yields on 3/4/5 brm homes then I would go for them, but not at the moment.

It's been quite for the rental front this month, don't know why.

and as for suffering in down turn, I think in Auckland City, the demand is always there, and rents usually go up during hard times as more people will be renting instead of buying.

As for the bank taking into account of only 75% of the rental income, there is a way around that, and depends on the risk you are willing to take.

[Jumpin]

So Shane
Interested to know how you calculate 8% yield as cashflow +ve. ?
Say rent = $400 pw = $20k pa (allowing for 2wk vacancy)
Mortgage io (say 6.5%) = $15600
Rates = say $2000 ?
Insurance = $600 ?
prop management + inspection fees $2000
Accountant $1000
Maintenance = $2000 average ?

Total exp = $23200
Cashflow = -$3200

You may have lower costs if you manage it yourself, and some years maintenance will be lower, but there is not much room for movement if interest rates go up?

[Shane D]

Jumpin

You are absolutely correct when using your figures an 8% gross yield is not truely cashflow positive. I use a more basic calculation that does not include accounting fees, less maintanance and Sth Aucland has lower rates.

The reason is, I have put in 30% deposits as an investor living overseas and are lucky enough to get very good cashflow from my employment. Thus I look at a 10 - 20 yr time line for these investment properties i will hold and are not overly concerned whether they are TRUELY cash positive after EVERY expense is taken into account.

Cashflow positive is more a general rule of thumb to make sure I am buying well.

Shane

[Jumpin]

Thanks Shane. 30% deposit is a good safely margin.
Another question if you don't mind answering. I've never felt comfortable with home and income places, as I guess I'm not too sure who would rent the 'and income' part. Is the property generally rented to a large family, or is the 'income' part rented as a second property? Are these places easy to rent?
thanks