What Strategy Is Best If You Want To Buy More And More Rentals? Part 2

27 June 2019

 

What Strategy Is Best If You Want To Buy More And More Rentals?  Continued ....


Make sure you have read Part 1 of our newsletter sent 7/06/19 with the first three options! Click here to read.




 

 

 

 

 

 

Recap
 
Martin and Jo own a personal house and are looking to buy a rental. 
 
Personal house worth $700,000 and debt of $400,000 with ANZ.  Currently being repaid over 20 years.  In five years, expecting $328,000 balance.
 
ANZ will allow them to borrow another $160,000 which could be used as a deposit for an investment property of up to $530,000 (I would recommend with a second bank).
They have income to meet the banks service requirements around the extra lending.
 
They can currently save around $200 per week, or $10,000 per year. 
 
 
 
What would you do?  How will the different strategies work over the next 5 years if the market is flat?
 
 SEE Part 1 of our newsletter for the first 3 ideas!  Click here to read.
 


4. Buy and add serious value – Subdivision and house on the back for example 

Would likely run at a large loss for the first year while being done, so lose the $10,000 potential savings in first year.
 
Once finished, aim would be to break even at least, so we will work on break even.  Income = expenses and no cash left for Principal repayments.
 
Would plan on at least $100,000 gain in equity on $500,000 property purchase.
 
Big Issue – would banks allow it?

  • $500,000 purchase.  Would use $150,000 of ANZ funds, and only $10,000 left. 70% lending through another bank, say Westpac.
  • Might cost $60,000 to subdivide and $160,000 to move a house on, renovate etc.
  • Might be worth $450,000 for existing, plus $370,000 for house moved on, or $820,000 total.
  • Once finished
    • Total debt would need to be $500,000 + $60,000 + $160,000 = $720,000
    • ANZ $160,000 secured over personal house
    • Westpac at 70% on $820,000 would lend $574,000
    • So, yes, this would work, and would still be $14,000 left!
    • BUT would be very tight while being done and might need to use a second tier lender.

 
Years 2-5 - could put extra savings into personal house debt repayment.  At end of 5 years, pesonal debt would be $288,000.  Gain in equity $40,000 over the current payments.


Overall:

  • Personal house worth $700,000, with debt of $288,000
    • Plus used to buy rental $160,000
    • $448,000 total debt
    • Available equity $112,000
  • Two Rentals worth $820,000
    • Westpac debt $560,000
    • Available equity $14,000

 
If the ANZ extra funds were put together with the Westpac funds, that would be $126,000, which could be used as a deposit for a third investment property of up to $420,000 in value.


IN A FLAT MARKET THIS STRATEGY STILL WORKS!




5.  Trading Stragegy

This is very dependent on being able to trade successfully, which isn't easy.


Buy a property for $400,000

  • BNZ $280,000 loan
  • ANZ extra $120,000 on personal house loan to buy
  • then extra $40,000 from ANZ to renovate.

Say make $30,000 after all expenses, GST and tax.

Do four trades in first two years = $120,000 cash.


Start of third year buy a long term hold

  • 6.0% gross yield property purchase in reasonable area
  • $500,000
  • $120,000 cash put in (probably would pay off personal home with this in reality)
  • $350,000 borrowed from say Westpac
  • $30,000 would need to come from ANZ secured over personal house

As cash in, can put on Principal and Interest over 30 years.



Third and fourth year, trade 4 properties = $120,000 cash.


Late 5th year buy another 6.0% gross yield property in reasonable area

  • $500,000
  • $120,000 cash put in (probably would pay off personal home with this in reality)
  • $350,000 borrowed from say Westpac
  • $30,000 would need to come from ANZ secured over personal house

As cash in, can put on Principal and Interest over 30 years.



END RESULT

- personal debt paid down, same as example 1 , down to $270,000.  Gain in equity $58,000 over the current payments.
  Extra $30,000 and $30,000 from ANZ to buy the rentals
  Total ANZ debt $330,000
  Available equity left $230,000 which enables Martin and Jo to keep trading
 
- First rental worth $500,000 and debt down to $331,000
                Passive income each year of (that is going towards principal payments)
                Available equity $19,000

- Second rental worth $500,000 and debt $350,000 from Westpac.
 
If the ANZ extra funds were put together with the Westpac funds, that would be $249,000, which could be used as a deposit for a third investment property of up to $830,000 in value, or enable Martin and Jo to keep trading and buy a cheaper long term hold.



As mentioned above, this strategy is higher risk and very dependent on being able to trade well and consistently, which is not easy.


IN A FLAT MARKET THIS STRATEGY STILL WORKS!




SUMMARY OF FIVE STRATEGIES
 

1. Buy nothing and repay personal house loan quicker – This is very dull and boring, very safe and it does work in a flat market.  Big risk is if the market goes up, you can be left behind.

  • At end of 5 years, might just be able to buy two rentals.

  

2. Buy a normal rental, 5% yield – Doesn’t work in a flat market.  After 5 years can’t buy another rental.

  • At end of 5 years, would only have the 1 rental.

 

3. 10% Gross yield property, repay principal over 25 years – This works in a flat market, and should be able to buy another rental in 5 years, even with no capital gain.

  • At end of 5 years, would have 1 rental and should have ability to buy a second.

 

4. Add serious value – This works in a flat market.  Perhaps higher risk and also awkward for finance while part way through the project.

  • At end of 5 years, would have 2 rentals and should have ability to buy a third.

 

5. Trading – much higher risk, but if successful, this strategy works in a flat market.

  • At end of 5 years, would have 2 rentals and should have the ability to buy a third and fourth.


Combining 4) and 5) together is quite common, with property investors developing a property, keeping some and selling some to achieve a balance between cashflow and tax efficiency.



Kind regards
Ross Barnett

 
 
 
 

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