Asset Distribution mix to give a consistent income in retirement?

Hi All,

On the back of my retirement income thread

Ideally I would have liked to have this via a survey but it is not easy to do so it requires some level of posting of details.

What asset mix do you plan to have to have a consistent income in retirement. The reason I am not asking this question is because...just relying on property income is not consistent unless you earn heaps as it will vary month to month.

If you are relying part or full pension either via the govt or a defined benefits pension say so.

Here is how I see it..let say I need 150k gross...I plan to use the following

65% rental income
10% cash/bond income
25% from top ASX dividend income

I have not factored super...but after 60 that will be another 40k odd income on top....based on a balance of say 900k.

 

relying on pension.... ..

 

Hey good strategy..ole sayin...go big or small but not between...holds so true now that the goobermint has changed the rules around the pension...a few people will start feeling the pain this year....

 

I expect to have a 300K + income from rent within @ 10-12 years. Even though its only a 15 property portfolio, because of the dividend reinvestment/debt reduction provided by negative gearing and NRAS, I expect to be able to clear all or most of the debt in 10 years or so...

I have pretty well already reduced my taxable income to zero for the next decade with simple, intelligent deployment of NRAS. So I am planning to add very few additional resi properties at this stage.... possibly 3 or 4 dual occ's as they will run pre tax positive and will top up the annual after tax cash flow by @ 8-8.5K each, initially..... but that figure will grow with time and rental inflation..

Now that Ive pretty much completed my personal acquisitions and have built a plan that assures me of a significant passive income even with zero growth, I am turning my attention to SMSF in 2017 . At the moment I am purchasing a 300K resi NRAS property through SMSF and I intend to use the same NRAS/debt reduction plan for that. ie I'm borrowing 210K ( 70% of 300K) and between my 25K member contribution + 8K CF+ from NRAS, I expect that debt to be fully offset within @7 years. I will likely add a dual occ to the SMSF as well in a few years time, and that will be paid down even faster, as the 25K member contribution + all the rent from INV 1 ( which will be largely debt free by then) + the 8K CF+ from the dual occ will allow for very rapid repayment. Then I'll add a 3rd and a 4th and a 5th ... we all know the compounding results that start happening thereafter

I'm 43 now. The idea is to have 5 or 6 resi properties (1 x NRAS and 4 or 5 x dual occ) unencumbered within 20 years or so , which should be straightforward enough using the debt reduction strategy above. This will leave me with the SMSF generating a significant rental income taxed at 15% pre pension, and then at 0% in pension phase - and it will all be considered earnings not contributions, and will therefore avoid the lifetime contribution limits.

I have also recently placed a couple of hundred K into the ASX. 100K in Super, and 100K in personal.. Im up @ 10% since early November 2016... but I know that any day I could be down 10% as well The 200K investment has literally been a punt. A toe in the water. Im trying to convince myself to diversify .....

So I'm building multiple income streams. Personal - should have 300K + from personal name by my early 50's... although I'll be paying some decent tax on that I guess.... and by my late 60's ( when I can access it) another 250-300K + from SMSF rental income from the NRAS and dual occ's , as the rental yields from those properties will have matured significantly by then....

To me, the certainty of being able to achieve these things without needing any growth ( not that I wouldnt welcome it) trumps any speculative approach , especially in such a heavily indebted, more restrictive credit era.

Anyone can do this. You dont need 20 or 30 properties and millions in net growth to do it. Depending on peoples available cash/equity and borrowing capacity, some may be able to be quite aggressive with this, and others may only be able to get 1,2 or 3 properties... but if you purchase strong yielding properties and use the surpluses they generate to pay down your PPOR first, then the properties, it absolutely works in delivering you a passive income for life. Takes time, but it works.

The other advantage of course- and its quite an advantage- is that by removing PPOR debt, which is non deductible and non income producing - you get a significant increase to your borrowing capacity. So reinvesting surpluses towards debt reduction is powerful even if you arent interested in a juicy passive income. If it's just for the purposes of getting mortgage free much faster, and building a larger growth focused portfolio, cash cows and debt reduction are still smart things to consider.

Otherwise...I'll just pour it all into a giant PPOR with a granny flat at pension age to avoid Centrelink 's asset test, sub let some rooms on the cash cash quiet quiet, and claim a pension and health care card

 

OK...couple of questions.....

1. What is the average rent per property?
2. Average property value...given they are NRAS ..I am presuming lower end?
3. Average depreciation amount per year?

 

I would love to see hear you writing a new post on the "dual occ" when you're ready to share..

Another stream of income for you can think of is writing a book...maybe a real estate book of how you got there or on NRAS...your writing is mostly engaging for me at least.

 

Wide and varied. Very few lower end actually... I have a few cheapies/cash cows, sure. I own 2 little 1 bedders at Port Macquarie that cost 260K each, for example. The market rents are 280 so I get 224 per week + the depreciation + NRAS = kapow! 11-12K tax free return on 12% deposit + stamps... ie 40K . That's a 30% return on my 40K , and it's tax free. I also have more expensive stuff like a 3 bed townhouse in Bungarribbee that I paid 560K for, and valued at 660 or 670 at settlement last year,. The upside of that was that I paid basically $0 towards the deal, as the bank took the end value. Same goes for a 2 bed apartment in Castle Hill I paid 620K for and valued at 780K at settlement. Bought a 2bd + study in Elanora Heights 3 years ago. I paid 590K for it and I just had it revalued at 850K. I also own some mid tier stuff like 3 bed townhouses in Orange and Dubbo. They havent moved more than 20K in 2 years. Thats fine... they are spitting out 9K + per annum. I also have several 2 bedders in Brisbane, in places like Alderley and Windsor and Mt Gravatt ... they've all moved 40-60K but I dont expect much from them for several years. Brisbane is flat, in spite of the hype. I have revalued 60+ properties in Brisbane in over a dozen suburbs in the past 2-3 months and the story is the same everywhere. But again, they have had some modest growth but the impiortant thing right now is...they spit out 9K or more, tax free. each. I'm also buying some little cash cows in Gosnells at the moment ( boo..WA) that spit out great numbers.... I dont understand the WA naysayers. Im putting in 12% + stamps - say 45-50K , to get back 10K per annum. And I'll get that for the next 9 years, and reinvest it in debt reduction. Even if the Gosnells properties , or any others , show no growth, I'm well ahead.

I also have non NRAS. I own a 2 bedder in Mt Druitt that I owe 50K on, that rents for $375 per week. I also own an old townhouse in Merrylands that I owe 185K on, and that rents for $360 per week. To be fair, it should get $450 per week, but I self manage it and they are 10 year tenants so I havent touched their rent in years....

I can tell you that across my portfolio, from the reduced rent I accept from NRAS, and the depreciation available to me, I have over 200K of deductible losses to offset against a 200K salary, which is what I draw down from my company as a personal salary. ie So I have more than I need to reduce my taxable income to below the $18,200 tax free threshold. So this of course means it turns into 200K tax free, plus I then get @ 140-150K back from NRAS credits after tax. Result is @ 340-350K tax free.

I have @ 5 Million in debt, but I have @ 2 million in offset, so my net debt is @ 3 million. A quick calculation based on after tax income will explain how I can clear the other 3 million in less than 10 years.... although I dont intend to... I want the neg gearing for the time being you see... hence why Im "trying" to convince myself to put the entire $2 Million into shares

Its just a simple dividend reinvestment plan, at the end of the day . I treat the neg gearing + NRAS credits as fully franked dividends. I treat the loans as margin loans, except they arent at call and I can go to 90% LVR. I simply reinvest profits, just like Warren Buffet does. The asset growth itself is secondary to me because equity doesnt create income. It just creates equity. And equity of itself holds no real value where income creation is concerned. Unless of course- you sell , or gear against it...and the reality is that most people ( perhaps not you, and perhaps not me- but definitely most people) dont have the incomes or borrowing capacity to just go on and on gearing against equity, forever. At some stage, they hit a ceiling and that is that unless they reduce their debt.

In the end though, it comes down to this - all philosophies, bias, ego and opinions aside, I could stop now ( other than the SMSF purchases mentioned above) I could make $0 growth on the lot ( even though Ive already had strong growth on the majority of my portfolio) and respectfully, still get a similar or better passive income than has taken you 20 years to build ,if you reach your 2020 goal. And I dont say that to be a wise ass... I say it because it's just true.

 

Dual Occ will be the next best thing. Its the exact same concept ; deploy dormant equity and borrowing capacity towards an asset that produces a surplus. Reinvest the surplus towards debt reduction. Repeat.

In the case of NRAS, the after tax result is reached by using superior neg gearing and NRAS credits. In the case of dual occ, the after tax result is reached a little differently, but it's roughly 80-85% of the NRAS outcome. The proviso being, it only delivers this at 500- 550k or below. If you get to 600K or more , the yields start to diminish. For this reason, dual occ will only deliver NRAS type debt reduction results if its done regionally , to meet the required price points

I have about 4, sometimes 6 , and at a stretch 8 paragraphs in me.... them I'm done. If you'd like a 1 page book - let ...sure

But it will sing the same song from the same hymn sheet.

dormant equity --- high yield ---- debt reduction ------ repeat

I used to do client workshops and ask them 5 questions

what if I can reduce your taxable income to zero?
what if I can increase your after tax income ?
what if I can help you pay your mortgage off 10-15 years sooner?
what if you could build a property portfolio?
what if you could do all of this without spending one dollar out of your pocket?

NRAS does exactly these 5 things... dual occ isnt quite as potent , especially in the first 10 years, but it is certainly the next best thing, and comes into its own from Year 11.

 

Okay some quick numbers:

1. $5m in assets
2. Net debt $3m (minus 2m in offsets)
3. Average of 6k per property (based on depreciation rate drops per year) or 15 x $6k = 90k
4. Average of $10k per property in NRAS cash back or 150k per annum
5. 4% gross yield on NRAS is bout 200k in rent

Total income (NRAS cashback plus rent) = $350k
Interest costs = 120k
Property expenses (approx 7k per property) = 105k
Land Tax = $5k

So net income is 110k of which very small portion is only table (about 20k due depreciation allowances). So lets say you have 100k net.

Lets also say you also save 50k from your income.

Over 10 years that is 1.5m.

I also plough back aobut 200k pa back into equity so very similar strategy ...but mine also has a slightly higher rate of growth....

 

Whose income are you looking at? Mine? If so, not very close I'm afraid.

I gave you NET figures, after all expenses and interest are accounted for.

Assets are valued at over $8 Million
Debt $5 Million - net debt $3 Million
Depreciation is significantly higher than you have estimated. It approaches 9-10K average per dwelling. Yes it will diminish over time, but that will be compensated for by the increasing NRAS... which as averaged @5% increase per annum since inception.
My gross rent at the moment ( after NRAS deduction ) is @ 245K

You are also making the classic mistake of including NRAS in your pre tax calculations. Don't do that. The NRAS credits are pure, after tax credits . They are refundable tax offsets and non assessable non exempt cash payments. I have explained this to you many times before. It's really simple.

200K salary is taxable
Tax return is lodged, and 200K of deductions are offset against the 200K taxable income
100% of the tax that I paid on the 200K,is refunded, so we are back to 200K - but its now 100% tax free.
Then add the 140-150K of NRAS credits
There's 350K NET...

 

I need to get some of your properties 300k net over 15 properties requires a gross income of 540k from rentals....that is approximately a rental income of 36k property. ...per year...wow....if these are NRAS ones...how do I get one of these.

 

NRAS and the associated cash flows require a rethink of everything you believe. You have PM'd me several times about NRAS in the past couple of years, and on each occasion you have said that after crunching the numbers its not appealing. I have proven over many different threads that the numbers are far better than you have ever been willing to concede, yet you are here again having an epiphany. Forgive me for saying so, but NRAS is not for you Sash .

 

Agreed.... ...I am not the sharpest tool in the shed...too confusing those numbers for me.

 

Its about as simple as maths gets.

Input 200K.
take out the tax during the financial year
give back the tax at the end of the financial year
give back another 150K on top of that, and what do you get?
350K.

anyway, back to the discussion about income streams. There are other members of the forum who have interesting tales to tell, Im sure

 

OK 350k net..so lets say you live off 150k pa...that is 200k net nest pas?

Here is one of my House and land examples

301k spent......end end value 380k on completion
Loan is 264k
Interest payment IO = 11,000
Other expenses = 5000
Rental income 375pw = 19500

Net positive income = 3500
Depreciatoin benefit 7000 (average over 10 years) applied at 49% marginal = 3500

So net income is 7000 per property.

15 new properties x 7000 = 105k per annum without other income for savings from income exclusing amount applied via depreciation.

Here is the kicker...the 80k loaded up front in equity...x 15 = $.12m.

So 105 x 10 = 1.05m plus 1.2m = 1.25m...very similar........to your strategy??

 

Firstly, you have done yourself out of $1 Million. 1.05M + 1.2 Mil is 2.25 Million, not 1.25 Million.
and 80K x 15 is 1.2 Million, not 0.12 Million..... Now, if you have $1 Million to give away... I'll take it off your hands ...but try to be careful with your millions and your decimal points please You made really fundamental errors in 100% of your posts, unfortunately.

Secondly - Your numbers. 49% neg gearing on all of your properties? I would suggest you have some at 37% and perhaps even some at 32.5% , which would reduce your net results to @ 5 or 6K in those instances.. You also spent 301K on the property but are saying your loan is 264K. Nevertheless, lets go with your numbers for now... even though I think they are likely closer to 5 or possibly 6K, not 7K

Third - there is confusion about income and equity. Can we agree that cash is different to equity? Cash is real paper ( or polymer, as the case may be) in a bank account , whereas equity is not.

If the conversation is INCOME - which you started this thread about , I'm not sure what relevance equity has? But OK. You are saying you have earned 80K upfront in free equity on each deal. Ok..nice. I already pointed out I made well over 100K on several of mine. Almost 200K on one before it settled. So I know all about those "kickers" ... again nice, but equity isnt in my bank account or yours.

That all being said, lets present the numbers using your very strange formula of cash + equity = income. I will be fair about this and say you made 80K on Day 1, and then an additional 50% growth on each over 10 years, for a total of 270K x 15 properties. Total of 4.05 Million. If I get the same 50% on my 8 Million property portfolio, thats @ $4 million

So if you earn 1.05 Million in cash and 4.05 Million in equity, and I can expect to earn 3.5 Million in cash + 4 Million in equity for a total income of 7.5 Million, Im wondering just how similar the strategies actually are...

anyway, as I said...there's no doubt you've worked hard and set yourself up very well. But you started a thread about income streams. I answered it and have demonstrated that it's possible to have done the same or similar to what you have done, but in a quarter of the time ( 4 years instead of 16 years) with half the # of properties (15 instead of 30+) all very simply because of the massive accelerated yields from NRAS and a dividend reinvestment /debt reduction approach..... If you had chosen to embrace it over the last 3-4 years while there were still good and cheap opportunities, you could have injected those additional accelerants into your portfolio, reduced debt faster, expanded the portfolio faster off the back of the debt reduction, and gotten to your 20 million much sooner But you chose not to... thats OK > you arent exactly starving either way I'm just pointing out that you can get a substantial passive income from fewer properties, using less debt, if you take a different approach. NRAS is nearly done, so dual occ is the next best option.

 

H&L is very similar to NRAS except for the tax free kicker. From my assessment there is a place for both in a strategy. IMO many NRAS properties are in locations that may have lower CG long term and the ones that aren't have lower income levels due to the higher cost. Whereas H&L can generate $5k pa post tax at same lvr, the uplift on completion can help you into the next deal quickly and the areas often IMO have more chance for growth.

Yes you can't eat CG at night but cash income puts food on the table (unless you want to LOE). However I think we have established before a balance of both is important if you have plans of selling some to reduce debt or diversify into ETF LIC area.

@euro73 your strategy has been amazing for you and would assist others on your income level. Sadly though it's pretty hard to replicate now. Though I look forward to adding some regional dual occasion to my portfolio, I accept these will not drive CG in large to my portfolio.

@sash strategy can still be deployed today in areas of Melbourne. And will
Move to other states as markets change.

In response to the OP I see my retirement at least 5-10 years off being driven by:

50-60% property
30-40% ETF LIC
10% cash silver gold TD

Edit: will be interesting to reassess regionals growth in 10 years as more people get priced out of capital cities though.

Edit: accept not adept...

 

That will be quite an occasion People will consider you an adept investor

 

Now I am very confused. Never mind, interesting thread, and whatever it takes to get there, and whatever strategy absolutely brilliant... different strokes for different folks, I am learning this one now.

MTR

 

what are you confused by?