Strategy going forward with running into serviceability issues..

[Murph]

Hi All,

Again this site is a great resource for learning which has helped us in the past and i'm hopeful for some feed back to get us to the next level.

We took a few years off in terms of property acquisition while we built up our businesses.

Currently we own 2 properties with valuations of about 2.3m and have debt which is also against the business of 1.3m

So I guess now that the business is running well and we are saving somewhere between 5k-8k per month we are considering purchasing more properties with the intention to hold for a passive income in 10 -15 years. (We are 41 & 40)

Just not sure the best way forward..

We have been on Interest Only since we purchased but are now thinking maybe we should change this over from a 30 year term to a 20 year P&I term to start paying down debt..

Is this advisable or should we look to use our 500k equity and monthly saving to purchase properties somewhere else? Our two properties are in Queenstown and have nearly doubled since we owned them.

Im leaning towards looking in Dunedin but it could be anywhere, to me Queenstown is peaking and there will be better opportunities in the future.

The two properties are in a Look through company with one bank so I guess the question with regards to serviceability is should we go to the bank and get the 500k into a revolving credit so it sits at 20%. Use that money as deposits for another 4 properties (120k each) in Dunedin on properties around the 300k mark? Is it 40% deposit requirements if there is a loop hole we could get 6-8 properties etc

Put the lot on 20 year P&I loans and use our monthly savings to pay down the revolving credit account? Hold long term and reevaluate in 5 years or so?

Very nubbie question I'm sure..... We have been lucky and done well already but we just want to make it to the next level without a huge amount of risk so we can draw a passive income in the future.

All the best

Murph

[Don't believe the Hype]

If you're looking for cashflow in 10-15 years the shortest and simplest answer is to review NETT yield locations, focus on the top 5 areas make a decision on which of these areas meet your purchase criteria...

The he reality is it doesn't matter where in the country they are as long as they meet your investment criteri and based on your clear objective of delivering cashflow out of the properties any discussion on future value or potential gain out of location X vs. location Y is simply a distraction. (This feedback would be different if you said you were chasing capital gains)

Assess nett yield locations, pay down PPOR debt first then use the $5-8k month to aggressively pay down debt over the next 10-15 years.

good luck

[Murph]

If you're looking for cashflow in 10-15 years the shortest and simplest answer is to review NETT yield locations, focus on the top 5 areas make a decision on which of these areas meet your purchase criteria...

The he reality is it doesn't matter where in the country they are as long as they meet your investment criteri and based on your clear objective of delivering cashflow out of the properties any discussion on future value or potential gain out of location X vs. location Y is simply a distraction. (This feedback would be different if you said you were chasing capital gains)

Assess nett yield locations, pay down PPOR debt first then use the $5-8k month to aggressively pay down debt over the next 10-15 years.

good luck

Could I still not expect growth of 5%-7% on average over 10 or 15 years?

Assuming 7% the new investment properties would likely double in 10 years or so?

I would not expect the rampant growth we have witnessed in Queenstown but I would hope to average at least 7% over the medium term otherwise I would reconsider and buy less properties but in areas where I could get a mixture of growth and yield....

I guess if I bought say 4 wait for them to double whilst paying down debt, sell one or two then to pay off remaining debt and live off the passive income stream...

Is this to overly optimistic or foolhardy??

Murph

[Don't believe the Hype]

It's neither optimistic nor foolhardy... It's just not a clear cashflow strategy.

What you're describing is a hope of some capital gain to deliver you asset value growth which in 10-15 years you you would cash out and buy an income producing asset.

the thing is asset appreciation is not guaranteed, it is likely to come based on historical performance but using Wellington as an example there was 7-8 years with ZERO growth. If you'd attempted the strategy you outline in 2008 you'd be selling in 2015 for about the same price you bought for, accounting for inflation in real terms you'd have gone backwards.

if you want capital appreciation AND cash flow, based on you developing a business that delivers you profit of $100k/yr profit in just 2 years why not flow your cash into growing your business? 2 more years growing the way the last 2 years did and you'll be clearing $200k/ur far better result than you'd achieve buying 4 IP's worth $1.2m.

[Nick G]

What risks are there to your business tho if you take on more debt, interest rates go up, the economy takes a knock... and you have a long vacancy?

[Murph]

It's neither optimistic nor foolhardy... It's just not a clear cashflow strategy.

What you're describing is a hope of some capital gain to deliver you asset value growth which in 10-15 years you you would cash out and buy an income producing asset.

the thing is asset appreciation is not guaranteed, it is likely to come based on historical performance but using Wellington as an example there was 7-8 years with ZERO growth. If you'd attempted the strategy you outline in 2008 you'd be selling in 2015 for about the same price you bought for, accounting for inflation in real terms you'd have gone backwards.

if you want capital appreciation AND cash flow, based on you developing a business that delivers you profit of $100k/yr profit in just 2 years why not flow your cash into growing your business? 2 more years growing the way the last 2 years did and you'll be clearing $200k/ur far better result than you'd achieve buying 4 IP's worth $1.2m.

Another good question- Thanks.

I guess the business is as big as we want it and if we can earn 125k each per year than that is good enough for us.
Any more is a bonus and less is not the end of the world and we tighten up a bit.
The books I read have told me the best strategy is to use a business's cash flow to buy growth assets.
We did this when we started investing and before we had the business.
Now that there are steady funds from the business we can either:

1. Pay down debt
2. Save and have a deposit with the view to buy 1 property every year or two, borrow the rest etc
3. Leverage hard now and spend the next 10 years in debt up to our eye balls but be actively reducing debt as fast as we can

Any other options any of you could recommend?

Thanks,

Murph

[Murph]

What risks are there to your business tho if you take on more debt, interest rates go up, the economy takes a knock... and you have a long vacancy?

Another great question!!

I guess I would leave 50-100k in the revolving credit account so that if any of the above happened we would have a cushion until things improved..
I would also fix rates at the best interest rates over 3-5 years for certainty of costs etc.

Murph

[Don't believe the Hype]

Another good question- Thanks.

I guess the business is as big as we want it and if we can earn 125k each per year than that is good enough for us.
Any more is a bonus and less is not the end of the world and we tighten up a bit.
The books I read have told me the best strategy is to use a business's cash flow to buy growth assets.
We did this when we started investing and before we had the business.
Now that there are steady funds from the business we can either:

1. Pay down debt
2. Save and have a deposit with the view to buy 1 property every year or two, borrow the rest etc
3. Leverage hard now and spend the next 10 years in debt up to our eye balls but be actively reducing debt as fast as we can

Any other options any of you could recommend?

Thanks,

Murph

the line I've bolded and underlined in your comment is contradictory to your first post... In the first post you're asking about creating cashflow from properties while the bold/underline talks about buying growth assets.

are you looking to buy cashflow property or a growth asset?


the option we recommend can only happen once you have a clear objective which I think is where you're getting stuck.

[Murph]

the line I've bolded and underlined in your comment is contradictory to your first post... In the first post you're asking about creating cashflow from properties while the bold/underline talks about buying growth assets.

are you looking to buy cashflow property or a growth asset?


the option we recommend can only happen once you have a clear objective which I think is where you're getting stuck.

Yeah ok now I get it...
Guess I thought you could get a bit of both..
Been spending all day looking at Property Talk threads and I just keep coming back to Queenstown!
Prices are sooo high here at the moment that I think its buying at the top of the market if I was to pull the trigger now..

Murph

[Don't believe the Hype]

You can get a balance of reasonable cash flow And POTENTIAL capital growth - there are a number of theories on how to increase the likelihood of getting capital appreciation which you can find on this site, some based in economic theory (i.e supply/demand or industry/employment hotspots or immigration trends) others based on historical performance other still based on hope however you need to understand that future appreciation is not a certainty.

based on my chosen strategy that has come out of a very clear objective I certainly would not be buying queenstown ATM.

[Minz]

If I were you, I would not look to buy properties that are in the lower end of the market (i.e. Under 300K Dunedin properties) as you have your business for CF. I would buy a quality property outside of Queenstown and Wanaka - close enough for you to be able to visit/manage. Possibly you will get capital gain and maybe able to add value to the property. Clipping a ticket on a rental property may not be best for your plans.

That said, I don't know you, I don't know your business - I only see what you have written and apply it to how I would handle going forwards (I like quality, I like conservative, I like being able to manage any emergency situation, and I like it when the bank likes me).

[Nick G]

I like being contrarian, take a good look at Christchurch, it's cheap, a mid-term bet and your butcher will try to talk you out of it ;-)

[Courham]

I like being contrarian, take a good look at Christchurch, it's cheap, a mid-term bet and your butcher will try to talk you out of it ;-)

CHCH cheap? I guess compared to Wellington & Auckland but that isn't saying much in these debt fuelled days. I'd do my homework if looking there these days, rents declining as more houses become available. Sure to be some good buys but definitely a market undergoing change so if you are going to look there do your research.

Craig

[Nick G]

Compared to other similarly sized cities.

[Murph]

If I were you, I would not look to buy properties that are in the lower end of the market (i.e. Under 300K Dunedin properties) as you have your business for CF. I would buy a quality property outside of Queenstown and Wanaka - close enough for you to be able to visit/manage. Possibly you will get capital gain and maybe able to add value to the property. Clipping a ticket on a rental property may not be best for your plans.

That said, I don't know you, I don't know your business - I only see what you have written and apply it to how I would handle going forwards (I like quality, I like conservative, I like being able to manage any emergency situation, and I like it when the bank likes me).

Ok so what about this an an idea to get moving forward..

As mentioned about the investment property which is tenanted upstairs and rented out as storage down stairs for a combined income of $965 per week.
Currently on interest only it costs me about $1400 per week so about $500 per week but that is also covering some debt against our business and PPOR.

There is an option to apply for planning permission to convert the 130 sm basement into 2 flats that would bring in about $500 each per week.

Back of envelope calculations with some mates who are in the building industry figure it would cost $150k but lets say with resource consent and a few hiccups it blows out to 200k.

The increased borrowing would add about 12k per year, so.. it would bring up my weekly interest only repayments to $1620 but the rents would also increase from $965 per week to $1700 per week.

So I guess it would change from costing me $26000 per year to hold to costing me nil other than repairs and maintenance etc etc.

It would also likely increase the property value.

Now that the property neutrally geared the 5k-8k we save monthly could be either used to pay down debt which im sure is advisable considering the level of debt being 1.53m with assets of at least 2.3m (without taking into account the property value increase from the development) or used for future property investment.

Obviously a lot of planning involved to get the plan in place and costs figured out but would this be a better option than buying another investment property at the moment?

The property is a house on high density zoned land 500m from downtown Queenstown.

Thanks,

Murphy