How We Do It
Here we unpack the full box and dice around building a portfolio, how we tailor the approach to your bespoke needs and what it looks like in a spreadsheet. Finally, we discuss the next steps and how we keep moving forward.
Everyone’s circumstances, requirements and goals are different, so it’s important that each strategy is tailor-made to those needs. More importantly, is the sleep at night factor. By that we mean, we can cut up an approach and strategy in many different ways, but ultimately, we need to ensure your best interests are kept at heart and you can sleep at night after signing off on the strategy.
We are big advocates of purchasing houses as opposed to units and we look for houses where value can be added by way of cosmetic, structural and/or sub-dividing. Of course, not all of those value-add scenarios meet everyone’s criteria, however, it’s an important POD on properties you own if they have potential to add value in the future; either for you or prospective buyers. This adds a significant weighting to the value, but also, most importantly allows you to manufacture equity when your funds permit throughout the ownership phase.
We like to add value to the property immediately by way of cosmetic renovations. This is a quick and cost-effective renovation that will ultimately increase your rent and equity in the property from the outset. We then allow time in the growth stage of the portfolio to further significantly add value to the property by way of structural renovations, second dwellings and/or sub-divisions. Again, creating and manufacturing equity to continue the growth and accumulation in your property portfolio.
In terms of asset selection criteria when building a portfolio, it’s important to wash this with your income and ability to hold a portfolio. By this, specifically, we mean, for higher income earners we are looking at a lower yield, higher capital growth asset. For lower income earners, we are looking for a higher-yielding asset where the rent received covers the majority of the outgoings. In both cases, we are still ensuring that the total out of pocket expenses is kept to a minimum, as this is crucial for your cash flow and ability to grow a portfolio.
Implementing the right financial structures is incredibly vital for any property portfolio and one key item is the emphasis on Interest only lending that enables you to maximise your cash flow position. Likewise is the emphasis of offset facilities to help reduce your monthly liability and manipulate to some extent, your out of pocket expenses and reduce the interest you pay on your loan. An offset account is a transaction account linked to your home loan account. The account’s balance is ‘offset’ daily against your home loan balance, and as a result, you’re only charged interest on the difference between the two.
Ultimately, the end goal is for your portfolio to be unencumbered to deliver you a great passive income for retirement.
There are three stages of building a property portfolio, they are:
The main priority is creating leverage in the market and expanding your portfolio through a combination of growth and high yielding properties
This is when you begin consolidating your portfolio and your debt by adding value to your existing portfolio through smart and effective renovations, adjusting rents and capitalising on land sub-division opportunities
This is when you create strategic results in your portfolio based on your goals, meaning, if you now only want to work three days per week and you need to supplement your income, we can look at re-modelling the portfolio to suit.
To do this, at Milk Chocolate, we focus on the following steps to building the portfolio:
1. Clarify your position and goals
2. Evaluate the most appropriate tactics
3. Establish a plan for cash flow
4. Suburb and property specific due-diligence
5. Ongoing management
Finally, it is imperative that we protect you and your assets from the outset, so this involves personal income protection that covers you in case of injury or permanent disability and of course, building and landlord insurance for each property that is purchased.
Tax position - You are well and truly exposed as an expat, paying 32.5 cents tax for every dollar earnt. Key driver on your strategy is tax optimisation on the way to achieving a passive income from your portfolio. Initially, with the recommended renovations, we will be able to extract significant depreciation offsets
Negatively geared purchases to be considered to also reduce your tax liability in the short-medium term
Land tax - All properties are in QLD at the moment providing a hefty absentee land tax bill. We will ensure purchases moving forward are outside of Queensland to minimise this liability
Utilising the bank's money whilst you can to grow your portfolio
If you have a liquid cash position, we can utilise this to offset your loans and reduce interest paid across your encumbered securities
Feasibilities on small development opportunities to further diversify the portfolio and long-term ability to heavily contribute to your passive income goals
The addition of two-three high growth, low yielding properties at a low cost will help balance the portfolio and aid as a tax offset against the rest of the portfolio. Properties with the ability to renovate and depreciate are also a consideration.
There are a few moving pieces to this strategy, so we want to break it into two parts. The first is the current portfolio and then the second part will be the growth and accumulation of your portfolio. At this point, we want to only discuss the current portfolio strategy as this will then dictate how we progress. Below, we have detailed each holding in your portfolio and our recommendations.
Ann St - Sell
Unfortunately, (or fortunately, whichever way you look at it) Ann Street hasn't been the best performer. As a general rule of thumb, we are not advocates of unit purchases, but that's not saying they don't add value. In this instance, however, Brisbane inner city units are extremely oversupplied and will continue to play out this way for the foreseeable future. This does not bode well for your unit or any unit in the inner city. Our valuations have this sitting at $185,000, which is significantly less than what you paid for it. Taking into account your passive income goals, and the fact this is only netting a return of $4,480.p.a with negative to flat growth - the money will work harder with other investments.
Consideration was made to do an ultra cool NYC themed renovation, however, you would barely break even on a $20k spend, looking at other comps in the building. So the decision was to either leave it as is and hold or sell and re-distribute the capital elsewhere.
The key benefit here is the capital loss which we can carry forward to offset capital gains in the future (silver lining).
Thrower Drive - Hold
Your only asset with a mortgage against it and we don't mind this. The property itself is great and definitely provides the portfolio with a significant point of difference. The house is functional and optimised for its current use as a short-term let. The property does not need any work, and whilst you are happy to manage the property, we believe that is the best option at this stage for the property as it gives you an abode for your holidays back in Australia. Our long-term rental appraisal does sit close to your current rental turnover, so if you are not fussed about having this as an option to stay in when you return back to Australia for holidays etc, then your position would be financially equal. So it's more of a lifestyle decision as opposed to financial.
Ives St - Hold and Renovate
Currently leased and your intention is to move back into this as your principal place of residence. As you will see on your Milk Bar, we have identified two opportunities with this property. Both rely on your timings to move back home and a confirmation to whether or not you believe this will be your forever home. If the property will be the forever home, we recommend looking to structurally renovate and extend to take advantage of the large plot of land along with the southern district outlook. Allow 12-18 months for the due-diligence design and renovation of this and you should time it with your return working back from 18-months. If you don't believe it will be your principal place of residence, then we recommend cosmetically updating the property and we have provided more details on this in your Milk Bar. The key reason to cosmetically update is to maximise your yield and attract a high-quality tenant.
Jefferson Lane - Hold and Develop
Our favourite! An amazing location and most definitely the pin-up of the portfolio. Iconic location with an amazing DA approved addition and change of use on the site. The current property itself is suffering noticeable signs of decay on the exterior - mainly due to the salt and erosion this causes. Excitingly, the lane and surrounding streets posses numerous recently built and renovated homes, creating a really nice and exclusive pocket of Australia. Our recommendation is to definitely consider and pursue carrying out the development as per the proposed plans. This will be the anchor and key to your portfolio and we believe it provides a rare opportunity to add significant value - both on the new beach house and cosmetically improving the existing home.
The opportunity exists to borrow against the property for the renovation as opposed to paying cash. There is also the significant depreciation that this renovation will provide, further helping to reduce your tax liability and improve your tax position.
Japan - Hold
We would like to discuss this holding in more detail to understand your intentions and how this looks financially.
Time to get our hands dirty, lift up the bonnet and see how it all works. This is an overview spreadsheet that highlights your portfolio position and cash flows. More on this also on the Milk Bar page.
These calculations are an assumption and you should consult with your accountant to get a complete understanding of your personal tax position.
You have a lot of information to digest! So, take your time to review our strategy and recommendations. As per our timeline, we'd like to book in a call on the 11th of January to go over the strategy and answer any questions you might have.
Once we are on the same page regarding the strategy, we will then build this out and bring in your financial team. We will confirm the numbers and structure of the strategy to ensure it's washed with your personal financial and tax position.
Below is a snapshot of what the process looks like from here and topline timings associated with that.
* Milk Chocolate price data used on this website is sourced and relies upon information supplied by a number of external sources (including governmental authorities). This data is supplied on the basis that while Milk Chocolate believes all the information provided will be correct at the time of writing, it does not warrant its accuracy or completeness and to the full extent allowed by law excludes liability in contract, tort or otherwise, for any loss or damage sustained by you, or by any other person or body corporate arising from or in connection with the supply or use of the whole or any part of the information on this website through any cause whatsoever and limits any liability it may have to the amount paid to the external sources for the supply of such information.