Advice needed! To buy another investment or pay off current investments?

Hello Everyone,

Thanks for taking the time to read this and hopefully you help provide me with some advice moving forward or for anyone that could also learn from this in a similar position.

My current situation: I'm 27 years old living in Brisbane and earn $250k per year and I own Two investment property's. Both are negatively geared (heavily I would think). I'll list my portfolio info below to help give you exact figures and where I'm at. I am wanting to build a portfolio over the next Ten years to help me retire from my job and live off cash flow from the property's I've purchased. My first idea was just to get in the market, buy good solid propertys (even if they were negatively geared) to aim for high capital gains.
I'm now in a position where I have saved another 80k and I am unsure if I should be paying off one of the loans (or keeping in my offset) to reduce some of the costs or to keep saving and buy another property that would be lined towards my long term goals. My main concern is that its scary knowing that I am out of pocket aprox 30k every year without factoring in capital gains I could earn.

Current portfolio.
First property - 3bdr/1bth 607sq house in Stafford Heights, Brisbane worth $575k @ 87% LVR.
Rented out, currently $13,000 negatively geared after all expenses.

Second property - 3bdr/1bth 607sq house in Everton Park, Brisbane thats an LMR block worth around $630k at 89% LVR. Rented out, currently $18,000 negatively geared after all expenses.

Thanks again, I look forward to hearing your advice!

 

Hey Rolf, Thanks for the reply.

I'm paid under a commission structure, so my yearly earnings can fluctuate. I don't see it dipping below 200k but worst case scenario I wouldn't drop below 100k.

I don't have any plans over the next 5-10 years of owning an owner occ, renting currently suits me and don't see it changing for a while.

Thanks,
Mark

 

So if you were not working (eg lost your job or got sick) you would need to find $31k per annum to hold onto the properties you have (plus more for your living expenses). This is in theory fine if you have a large emergency fund stashed in an offset account but is otherwise a worrying risk hanging over your head... and is even more worrying if you take on another negatively-geared property.

My vote is protect what you have before taking on additional responsibilities. Get a solid 6months of mortgage money and living expenses money into the offset accounts as your emergency fund. Yes if you run into strife you could sell something, but it does not take zero time to realize you're in trouble, advertise the property for sale, find a buyer, and settle.

The $80k goes a fair way to assembling a 6month emergency fund but has a little way to go yet.

I would keep it in the offset rather than pay it off the loan.

 

If I was earning $5K a week I'd be taking full advantage of negative gearing before there is a change of government.

Buy up.

 

If you think the property is going to grow more than say 3 or 4% pa then you may be better off, in the long run, by buying more.

Paying down loans results in higher tax being paid whereas buying more property will result in less immediate tax, but more in capital gains later - which are concessionally taxed.

Just make sure you have enough of a buffer.

 

At 27, I wouldn't assume that I would continue to earn 250k per year forever. Make sure you always have a plan for life curve ball/s.

 

Thanks jacM, whats your view on having income protection to cover the risk of getting sick/injured etc? Its something I looked into a while back but never went ahead with.

 

Thanks terry, appreciate the response. This is what I was initially thinking. In your opinion how much negative gearing is too much over Two or Three property's?

In the long run if I can afford to hold the property's being negatively geared over a long period of time I guess I will be better off, its just risk vs reward I guess?

I just want to make sure I'm not missing any other key info/points or traps for young players

 

If you decide to get another I would suggest you run the numbers with a conservative growth figure because even with the tax benefits you are losing lots of money each week. Need to make sure your going to get that back factoring in CGT.

From my personal experience you feel the squeeze very quickly when your income drops.

Also income protection is well worth it. I have had long stints off work from sports injury and it gives you piece of mind to get the correct treatment and not rush back to work. It should be tax deductible also..

 

I wasn't advocating negative gearing, but purchasing quality property with growth potential. Username makes a good point - factor in low growth for a while.

How much you can afford will be limited by the conservative bank servicing calculators anyway so you can't really go overboard, but make sure you have good buffers.

 

You would need to be very clear on the exclusions and weigh up whether the policy would likely ever pay out. If not perhaps better to indirectly self-insure by keeping large reserves in offsets.

 

Your on a great income, if it was me I would be accumulating at least another 1-2 before focusing on debt reduction.

I also own and currently live in one of those suburbs you mention and am finding there’s good growth here, as Datto said buy up.

Guess it comes back to how much you need, you make $250k now, is that what you expect to retire on or would half that do? In which 4 Unencumbered should do it

 

One of the aims mentioned is to build a property portfolio over the next ten years to live off rents and retire early. So need to do some quick calculations to see what is required. Using a baseline “100k pa income” and using a normative 5% gross yield would imply $2m of unencumbered property or $2m equity. However, need to allow for expenses of property mgt fees, insurance, rates etc so net yield is much less (let’s say 4%) and this would require $2.5m unencumbered or equity - and of course need to pay income tax on the net income, and net yields can be quite low.

So at the moment, you have about $1.2m value with just over $100k equity. Now assuming the “property doubles every ten years” myth as being valid, you would basically need to buy another $1m worth of property to have a $2m portfolio so it can double to $4m in 10 years to achieve the target net rental income, assuming you’ve maintained interest only loans for that time, and rental yields have maintained pace.

Now, I’m not trying to be negative here, but “painting a picture” of what needs to be achieved and working backwards from there. From the above example, the issues are:
- likely growth rates over the next ten years, “buy and hope”.
- rents increasing over that time and good yields being achieved.
- financing situation, ability to continue to borrow and maintain interest only loans.
- interest rates continuing to be low/reasonable.
- the opportunity cost of not buying a PPOR as if IPs are increasing then PPOR likely to increase and maybe out of reach.

Hence, the aim is possible but would require an aggressive approach with the hope that future factors in the desired time frame are positive.

So what are the alternatives?
I) Property Development. Take a more active approach to develop skills in property development (seems you got an LMR site). Learn these skills by say attending Brisbane Property Networking Group, participating in Nhan Nguyen’s Advanced Property Strategies course, or working with some other experienced property developers (e.g. Rob Flux, Shane Hiscock etc). You may be able to do some renovations on your existing properties to improve rent and value.

II) Pay down debt. Follow the advice of the likes @euro73 and focus on aggressive paying down of your debt to improve cash flow and borrowing capacity.

III) Consider the property mix. Looks for properties where you can add value or improve returns eg. Dual Occ, subdivision potential, below market value deals etc.

IV) Other asset classes. Consider diversification into other asset classes (shares ETFs/LICs) and ongoing contributions to super.

V) PPOR. Re-evaluate your position on PPOR and focus on paying down debt, and doing a debt recycling strategy.

VI) Enjoy life and take “getting rich” at a more comfortable pace. Being 27 and looking forward to the next 10 to 15 years, likelihood of a life partner and family, - and of course, everything is different then, priorities and life requirements also change.

 

Correction on above comment, $80k should in theory be adequate slushy for 6months, presuming no other encumbrances or dependants or rental vacancies My late night brain was thinking of figures needed for 12months. $80k would be slushy enough to cover you and 4 IPs assuming modest living expenses. Beware of when they convert from IO to P&I though.

 

Me personally I would try to get LVR to 75%
Than add more

I feel taking a brake every 1/2 years go improve LVR and build buffers in is not a bad strategy.

If the market is 8% and up and running like a bull sure buy up. I feel its not doing that now even in Brisbane.

 

I think you need to work first determine how much do you want your property to be earning you per annum when you retire. Then work your way back from that to find how many properties you need to earn outright to achieve that. Then strategise your investment journey based off that.