Q&A: Starting out

LAJ13 asks:
Hi Olly,
By this Hello Olly I am new to the property investment business. I am in my early fifties with approx. $500k equity in our home property which is valued at approx. $800k.

Having had no discernible savings plan up until now, I am in a hurry to make amends! From the reading I have done recently, I believe I have no option but to take a riskier approach than, for instance, someone in their thirties or forties, in order to attain financial security by my early sixties. As a result, I am considering the following scenario:

Utilising the available equity in our home, purchase 8 properties at approx. value of $240k each, for a net asset / debt ratio of 2720k / 2220k i.e. around 80%. For the properties I am considering, it would appear that rental returns would be equivalent to the interest repayments, so, at first glance, it looks viable. I have a regular income that I can fall back on to supplement repayments, should e.g. interest rate movements become an issue. My aim is to purchase 2 further properties at the start of year 2, then 2 more at the start of year 3 (assuming favourable price increases), increasing the portfolio at every opportunity.

I guess what I’m asking is, for someone in my position, is this simply too risky?

Many thanks for the opportunity of asking a free question, and hopefully I’ve spelt out my game plan clearly.

Olly replies:
laj13. Your situation is common but rushing into debt is not advisable. You say using the equity in your home you would like to buy 8 properties at around $240K each.

According to your figures your equity is $500K but you may not be able to access that whole amount. If the value of your home is correct at $800K then borrowing say 80% = $640K less what you currently owe of $300K = $340K in the hand (maybe).

Eight properties of $240K each average = $1,920,000 x 80% borrowings = $1.536M which you just might be able to scrape into with the $340K cash raised on your home.

But you are effectively borrowing 100% ( your home and the rentals) so interest on the total package at ( say) x 7.2% =$138,240 p.a. or $17,280 per property or $332 per week . Deduct off rates, costs, repairs, management, vacancies etc and the net per property will be likely closer to $250 per week.

The shortfall could therefore be $34,240 approx p.a.or more if interest rates rise.

However the realities are that banks would be very unhappy with this structure unless you have other income which is substantial enough to cover any shortfall.

Having said all that, it is possible, but you would have to make each purchase a winner to ensure capital growth in a flat market. Where you buy, and what you buy will also be a big factor. You might be better advised to use non bank sources for finance which is more flexible but a little more expensive.

You could also consider commercial property ( shops factories etc) because the returns are higher and the out goings are usually covered by the tenants. But the vacancy factor is higher, and the lending criteria tougher.

I suggest you read my website and give me a call for a no-obligation chat because although your plan is workable in theory, it will be much harder to do in practice.

The alternative is to do nothing which = 0

Olly

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