Podcast: How to Create a Self-Funding Property Portfolio | Ep. 245

Posted by Ed McKnight on 15/05/20
How to Create a Self Funding Property Portfolio 001
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Show Notes

What's Covered in the Show?

In this episode, we discuss how you can create a self-funding property portfolio. Generally, in property investment, there are two types of properties that you want to buy – capital growth properties that tend to grow in value quickly and yield properties that produce more cashflow.

The trouble for most New Zealanders is that to invest in property they need to borrow the entire purchase price of a property. This typically means that capital growth properties will be cashflow negative. However, a self-funding property portfolio will have a mix of cashflow positive and negatively geared properties so that the cashflow cancel one another out.

This was the topic of a webinar, which we recently hosted. You are most welcome to come along to another of our property investment webinars, which are currently held every Tuesday at 7pm.


Transcript of the Podcast

Ed McKnight:
Hello and welcome along to the Property Academy podcast. I'm your host Ed McKnight, and I'm Andrew Nicol, and today on the show, we're talking about creating a self-funding property portfolio and what do we mean by this?

Well, when you borrow at a hundred percent in order to purchase property, so you borrow a hundred percent of the money in order to buy it, typically because those financing costs are relatively high then your property might be negatively geared slightly, and that's going to be different based on where the property is and the sort of gross yield that you are going to attract in each different market.

So in Auckland you might get superior capital growth, but it might be negatively geared by say, a hundred dollars or $50 whereas Christchurch you might get slightly less growth typically over the long term, but it won't be as negatively geared. It might be negative 25 $0 input cashflow neutral sort of thing.

Now that compares with a yield property where you're going to get some cash flow in the door each week, but you're probably as we said in a previous episode, going to get slightly less capital growth.

So how do you marry these up and create a diversified or balanced portfolio, if we can call it that, so that the cash flow you get from a yield property offsets or pays for the capital growth properties, those ones that are slightly negatively geared.

Andrew is a master at putting together these sorts of portfolios and he's just going to walk us through what this kind of balanced or self-funding portfolio might actually look like. And in some other books, you'll hear people call it different things. I

know one person I've read about calls it a wealth wheel because it pays for itself, but this is the kind of central idea behind this. Andrew, walk us through how this actually works.

Andrew Nicol: Sure. So, basically my immediate thing that I say to people is you want to be able to get your growth properties as quickly as possible because you don't know when the bank's going to limit your ability to borrow the next one.

And whilst you might say, well, I can go to a broker and figure out that I can borrow $2 million over the next four years, you never know when there's going to be a change in policy, like the LVR restrictions or something like that, or banks might increase their test rates or something might stop you.

So you do want to focus if you're building wealth on getting the growth properties first and then complimenting them with the yield. And so we spoke in our webinar last week, which is available online where we spoke about, you know, you might have a growth yield growth yield portfolio, or you might have a growth growth yield portfolio, or in this case today for this example, I'm going to talk about a growth growth growth yield portfolio.

So someone that maybe has really good income now, so can borrow money from the bank, they've got the ability to supplement their rental properties today, not with a deposit, but with a weekly contribution, but are going to want to carry these into retirement, say without having to put any money into it.

So I'll give you some examples. So I've worked on not only a diversified portfolio from a growth and yield perspective, but also diversified from a city perspective. So I've worked on the three major cities to begin with being Christchurch, sorry, three of the major cities being Christchurch, Hamilton and Auckland.

So I started out on a half million dollar purchase price of a property. I'm borrowing a hundred percent at three and a half percent interest rate, so I've worked on a higher than actual interest rate.

I've worked on 490 a week rent and then all of our usual costs, so allowing for all costs, maintenance, interest, vacancy, et cetera, and all up that property costs $36 per week.

That's the top up and it's a house in Christchurch it's probably going to get something like 5% capital growth rate over a 15 year period. And then I move on to property number two. Now for this, I've used a townhouse, that first one, by the way, it was a three bedroom house. The next one, I've done a two bedroom townhouse.

So again, I've diversified in the type of product. A two bedroom townhouse, two bed, two bathroom, in Hamilton for around about $580,000 and the rent on that is about 495 a week, so pretty similar to before. The rates, insurance, all those other costs, allowing for those, the top up per week for that is $80.

Okay. So $36 for the Christchurch property, $80 for the Hamilton townhouse. Then I've gone to Auckland and I've looked at a $625,000 townhouse, getting $550 a week. Again, allowing for all of those costs. Unusual, Auckland's in a unique position at the moment where the contributions only $64 a week in this example, compared to $80 for Hamilton.

So, that's really good to be able to get into Auckland at a cheaper rate than Hamilton's amazing. Yes, it's more expensive purchase price, but the rent is so much stronger there. So now you might get, say a 6% capital growth rate on that.

So whilst I'll use 5% for the Christchurch and Hamilton properties, I've used 6% for Auckland because it's the super city, it tends to get more over a longer period of time.

And then I've used an example of a Hamilton, room by room rental. I've used an example of a $730,000 purchase price value, and a $1000 a week rent. So room by room rentals tend to get a much higher percentage yield, but your capital growth will likely be less than the other products.

So I've used 3% to be conservative. I've said you might get 3% capital growth rate, but the good news on this one is it's $171 positively geared. Now, once you've got all four of those properties, the overall portfolio as basically neutrally geared, you're putting nothing into a per week because the high yielding Hamilton property is paying for the other three properties. So you're putting nothing in per week.

You can hold these for as long as you need to. Now, if you manage to hold them for 15 years and you got 5% for the house in Christchurch 5% growth for the townhouse in Hamilton, 6% growth for the townhouse in Auckland, and 3% for the room by room rental in Hamilton.

In 15 years, the equity is $2.4 million without having to put in a weekly contribution and without using a cash deposit at the start. That's pretty cool. So what we might do for a client that's done this, once they've got to a neutral perspective, then they might look at doing it all over again.

But if you just had those four properties and you built that up. And you managed to hold them for 15 years. That's a pretty good outcome. $2.4 million without having to put in a weekly contribution because you've created a wealth wheel, you've created a cashflow neutral portfolio, which means that you can hold those properties for as long as you need to.

Because you don't have to chip in per week out of your own spending money.

Ed McKnight: And I think a big part of the story there as well, Andrew, is about that diversity of the entire portfolio. Even though we said, look, it's going to be G G, G Y in terms of growth, growth, growth, yield, you've still got diversity in there in terms of the number of bedrooms, the type, whether it's a townhouse or a standalone versus the room by room rental. And within those cities as well.

And hey, the other thing that just, I find really amazing is the yields in Hamilton about how poor they are typically, you know, in terms of rents, houses are relatively expensive compared to the rent you're able to get.

And I think that probably says that we're likely to see some catch up in terms of, uh, rents within. Hamilton that we'll probably see them start to increase, especially as there is more economic development around there.

And we see incomes rising a little bit more because of the Ruakura development, the inland port that's going in there, which is a $5 billion investment and is likely to see significant other benefits within the economy.

So there's probably a bit of catch up to happen within Hamilton, just because the yields there are so poor at the moment, but hey, let's wrap it up there.

Of course, please don't forget to rate, review and subscribe to the podcast. It really does help us get the message out to more people and hey, if you want to learn more about property with Andrew and I, then why not check out some of our previous webinars that we record every Tuesday at 7:00 PM we've got all of the recordings available on our website at Opespartners co.nz, or we're also going to drop a link to those in the show notes.

So just tap or swipe over that cover art, it'll take you right there.

Thanks for listening to the Property Academy podcast. I'm your host Ed McKnight, and I'm Andrew Nicol, and we're going to be back again tomorrow with even more daily strategies, tactics, and insights to help you get the most out of the New Zealand property market.

Until next time.