Concerned my strategy lacks.. strategy

I come across 2 different types of people in my line of work - those that want a strategy mapped out for them, and those that are happy to take a step, assess - take another step, assess - and so on.

To have a rigid strategy can cause more problems than it solves, as it can't take into account changes in circumstance, knowledge, desire, and all modelling is done on assumed market movements that may or may not take place.

I reckon - start with what you want as a priority, and what you'd like ideally, and can achieve in the forseeable future - 2-3 years. While planning for those, spend just as much time planning for if it all turns to poo - risk management is paramount.

And then - do it.

 

Thanks Rolf,
I note you did say clarify goals in the earlier thread and you're quite right. Our goal is simple - financial security for our family via strategic wealth building.
I've set out the goals in the first post but in brief, PPOR - the consensus seems to be focus on that first and I agree.
2nd is build a portfolio with some CG and passive income eventually (this is not easy now as we all know, so despite having cash, we're coming unstuck with this as I suspect many other are). Markets are not good, even Perth has low yields as MTR pointed out. No doubt we're suffering some analysis paralysis but I know one bad investment could cause us to nosedive.
I'm studying all points made and really appreciate everyone's ideas.
Third is securing family with trust options.... one for later perhaps. Longer term goal which can wait for now...
Cheers

 

That means different things for different people. It's too general imo. It could mean a passive income of 60k, 100k, 200k 500k. And in what timeframe?

There are many that kinda frown upon having very specific goals but personally I believe the clearer you can be with as much detail as possible about you're goals, the greater the chance you have of hitting them. There will definitely be adjustments along the way, but I would try to be as clear as possible because you're goals will also influence the strategy/ies needed to give you the best chance of achieving them. Someone who wants to achieve 70k passive income in 20 years as opposed to 100k in 10 would have very different paths (and mindsets).

 

Um

Ok

Condescending nonsense.

 

Agreed, it does mean different things to different people and the amount of passive income we hope to achieve is based on our own circumstances, hence not putting figures on it here. I haven't mapped out everything in trying to explain our circumstances and goals but I've been as specific as I possibly could.
Thanks for the tips, it's been interesting.

 

Decide where you want to live first, especially with growing family, then look to invest! One step at a time.....
In RE Investing strategy is one thing but the second thing is what do you want to achieve from it? It has to be specific and measurable, what do you want to achieve in $ terms, what is the expectation, what does it mean? For example, to achieve $100K gross rent, then you would would work backwards what your asset base you need to grow. Then how many IPs time and market would dictate that, start with an IP and continue to learn, read some of the books, see how you go...you need to be able to create or grow asset base...so CG+ to become truly wealthy say over 30 years!

 

Thank you for your response, this is really helpful.

 

Sorry, this got really long...

I was in a similar situation to yourself.

I felt like we should have a strategy, and stick to it.
But when you actually break it down, in the "now moment" it is very difficult.
Nothing in life is certain and what seems like a good idea now may change dramatically in 10 years time, or tomorrow... But you still need a plan, right?
So I'm not sure if our "plan" is a "strategy" or not, but here's where we are at.

Went large on PPOR to avoid future selling/upgrading costs. It meant selling our IP.
Whilst that wasn't ideal it was the only way for us to get a freestanding house in inner ring Sydney on a decent block. We paid under market, and there are several things we can do to add value. It will be CGT free and provide a big lump sum come retirement.
We are now building up the offset account as fast as possible and our incomes are increasing.

We intend to take advantage of market cycles, both share market and property. What that means in specifics is unknown until the cycles start moving.
But essentially, I expect a medium-to-large share market plunge to occur at some point in the next 1-5 years. We will value invest our offset funds into stable cashed up businesses that have been oversold, probably in the US, and hold until they bounce back.
The trick then becomes whether to cash out, pay CGT and be debt free allowing many investment options or hold them long term. That decision can't be made yet, until other elements are clear. i.e. has the Sydney property market crashed/flatline/risen. Has the downturn caused an Aussie recession, do we still have jobs etc etc. Too many variables. Which makes planning an exact strategy impossible.
However two things are certain, markets will fall and then they will recover.
When and how long, impossible to say. But crashes present the best buying opportunities and should be taken advantage of. Offset accounts are purpose built for this.

We are in our mid/late thirties so I reckon we will have a least two more cycles to take advantage of.

Moving on from that, we intend to buy a nice harbour view apartment as an IP at an opportune time in the Sydney property cycle and pay it off fast. This will be our retirement pad allowing us to sell the house much more easily than if we have to "downsize" at the time. Also will be purchased much cheaper than waiting for retirement.

I believe in Sydney property long term, so should it crash hard at any point, we will take full advantage of that as well. But I see this as fairly unlikely at this point.

Income for retirement will most likely come from shares not property.

The real journey will almost certainly be different to the above but as long as you are an active investor, buy high quality assets when they are cheap, you should be just fine.

As for what our financial needs are. Who knows? I could pluck a number based on our current spending patterns and add a bit for my yacht, global travel etc. But basically, we will invest aggressively to our own risk profile and that will get us to where it gets us. We earn good money and as long as we don't make any disastrous investments we will have more than enough*.
n.b. Super is not even allowed for in the above, but we likely get clever with that as / when opportunities arise.

* I have modelled the "plan" to estimate high and low wealth and income, it's not total guess work.

 

Im going to show you a plan we hatched for a client recently...

They have a $1Million PPOR. Owe 300K . want 100K for some landscaping . He is mid 40's and earns earns 200K +. She is early fifties and earns @ 95K . Until this year they have been spending 70K on education for an adult child o/seas... that has recently ended.


Step 1. refinance the PPOR to 80% LVR 50/50 male and female applicant

Split 1 – 300K P&I
Split 2 - 100K landscaping P&I
Split 3 - 125K for INV #1 IO Deductible Debt
Split 4 - 125K for INV #2 IO Deductible Debt
Split 5 - 125K for INV #3 IO Deductible Debt
Split 6 - 25K for additional buffer IO Deductible Debt


Step 2. Buy INV #1 - 480K NRAS. Borrow 384K 80% LVR. 99% male /1% female
Use 125K from Split 1 to fund the 20% deposit + stamp duty + 10K cash flow buffer + legals

Step 3. Buy INV #2 - 480K NRAS. Borrow 384K 80% LVR. 99% male /1% female
Use 125K to fund 20% deposit + stamp duty + 10K cash flow buffer + legals

Step 4. Buy INV #3 580K Dual Occ . Borrow 464K 80% LVR. 50% /50% male / female
Use 125K to fund 20% deposit + stamp duty + legals No Buffer Required for Dual Occ


The 2 NRAS properties should produce @ 21K of deductions per property (42K in total )
This would be apportioned 99% to male applicant ($41,580) and 1% to female applicant ( $420)

The Dual Occ should produce @ 13K of deductions . Apportioned 50/50 ie @ 6.5K each

Across the 3 properties the clients should generate a total of @ 55K in deductible losses.
$48,080 would be offset against male applicants 220K income, reducing him to 37% MTR
$6,920 would be offset against female applicants 95K income, reducing her to 32.5% MTR

Across the 3 properties the clients should generate a total of @ 27K of additional tax free income. ( Approx $9700 per property )

So they will achieve the following

1. @48K reduction to male applicants taxable income
2. @7K reduction to female applicants taxable income
3. @29K of additional NET/AFTER TAX income , which can be reinvested towards rapid repayment of the 800K O/Occ Mortgage.

29K of extra repayments per annum would pay off the 800K mortgage in 14 years and 1 month - see below . But the clients also have 70K of additional income available, so they can make extra repayments of 99K per annum. The 800K loan can be paid down in 6 years and 4 months








With the O/Occ mortgage fully repaid, they will no longer be spending $44,376 per annum ( $3728 per month) repaying the 800K mortgage. They can then turn their attention to paying down the INV loans, which eould have reverted to P&I at this stage. With 99K available to make extra repayments + $44,736 available to make extra repayments, they can dedicate $143,736 per annum ( $11,978 per month ) towards extra repayments against the $1,232,000 of INV debt. ( 384K + 384K + 464K) This would enable them to pay down the remaining $1,232,000 of debt ( 384K + 384K + 464K ) in @ 6 years and 7 months







Result?

O/Occ owned outright within @ 6 years and 4 months
INV properties owned outright @ 6 years and 7 months later
So within @ 13 years, they will own everything and retain the 4 x rental incomes ( the dual occ provides 2 rental incomes so they generate 4 incomes across the 3 properties) . At todays market rents that would equate to $1475 per week, or $76,700 per annum. If rents have grown by just 50% in 13 years that may mean $115K of rental income by the time he is in his late 50's and she is in her mid 60's and nearing pension age....


Separately, they have also spoken with their planner about their SMSF, which has @ 260K in it. The planner is in agreement that they can supercharge their SMSF by using leverage and resi property to add to their passive income for retirement....


SMSF property # 1 - purchase Dual Occ 580K. Loan 406K P&I 70% LVR

Both applicants are in a position to contribute 25 K each into their SMSF. The property will run slightly positive - based on 70% LVR , a rate of 6.39% and P&I repayments - so their member contributions should be available to make 50K of extra repayments per annum. The 406K loan can be repaid in 6 years and 2 months under those circumstances.






SMSF Property #2 – in 6 years time.

Once the first SMSF loan is repaid, they may wish to add another Dual occ. This time, you will have all the rental income of $675 per week ( $35,100) + 50K contributions , and would be able to pay down that loan is in @ 4 years



Result - 2 Dual Occ's owned outright in their SMSF within @ 10 years, and generating over 70K per annum ....


SMSF Property # 3 - in 10 years time

Having paid off SMSF # 1 in 6 years, SMSF # 2 in 4 years, adding a 3rd and paying it off in @ 3 years would result in them holding @ 105,300 or rental income inside thior SMSF by pension age- and that's based on today's rents. if rents grow by just 50% in the 14-15 year period, that amount will be $157,950


115K income in personal names, minus taxes and running costs .
158K of income in Super, minus running costs.
Several Million of unencumbered assets.

All hypothetical of course... but doesn't require any growth and only requires 50% rental growth in 14-15 years to be achieved. I'd say it's a conservative estimate, if anything...

Point is - this is a plan. Easily implemented. Delivers even without growth . No speculation involved. Straight up resi property dividend reinvestment using cash cows.

 

Wow, Euro73 great example but as you say hypothetical.....

I have few questions:
- Why they need to be NRAS IPs not just any?
- Can it be 1 IP of 99%/1% split?
- Would it be perhaps wiser to hold off till election, to see who gets in and if negative gearing is still around?
- Wouldn't you advise the clients against $100K landscape cost, that's 10% of their property's price (huge IMO!)?
- In your example from split 6 the buffer remains only $5K after step 2 and 3, isn't this a bit low as a contingency?

For me personally very highly geared...just for income....just for me....but interesting example.
What would the properties be worth though at their retirement age?

 

The purpose is to use cash cows for dividend reinvestment - you need cash cows for that job . Hence NRAS and Dual Occ. If you use just any property you won’t get 9k CF+ , so you won’t pay the PPOR off in double quick time , and you won’t pay the investment property debt off in double quick time . If you want to buy “any property” you are back to speculating with vanilla yields and you will not only be entirely reliant on growth to make any money - you’ll hit the P&I cliff after 5 years and struggle with holding costs . It is literally the opposite effect of what I have suggested , and in my view it’s flat out dumb in this credit environment where growth is slowing and holding costs are rising . This strategy is specifically and exclusively built around cash cows .

You can use any % split you like for ownership. But in the example above the aim was to get both parties down a tax bracket . Because male applicant was well into the 45% bracket it made sense to assign higher % of the ownership - and therefore the deductibility , to him . It makes about 3-4K difference to their net surplus cash flow this way .

Neg Gearing changes proposed by labour will be grandfathered and will exclude new dwellings . These are new dwellings so waiting would provide zero advantage and would only reduce the remaining NRAS term - which would reduce the total cash flow advantages . So no I wouldn’t wait . The aim is to get all the juice possible out of the lemon I don’t think they’ll pursue the policy if they get elected , anyway ... APRA has done the work for them. They don’t need to spend the political capital . First Home Buyers are now able to compete as investors have had their capacity halved . But as I said - even if they pursue it , it doesn’t affect what I have mapped out above , in any way .

The 100k includes driveway , landscaping etc on a recently completed PPOR which they built and which didn’t include these items - shakes head . So it just has to be done . Will lift the value considerably , and 100k is not a lot of money for such work in Sydney .

Splits 3 and 4 (125k ) already include 10k buffer each . You may have missed that in my post .
For the 2 NRAS purchases of 480k each,the 125k covers the 20% deposit of 96k, plus stamp duty of 17k + 10k buffer + 2k legals
For the dual occ no buffer is required as the property runs @4-5k positive pre tax.
Split 6 has 25k of additional buffer - so there’s actually 45k of total buffer when you look at it in detail. 20k for the 2x NRAS and an additional 25k
My structures are always set up with buffers . They are designed to be deliberately injury, illness and incapacity proof.

When you say “highly geared just for income “ don’t forget that there’s no debt in 13-14 years . And don’t forget the debt is significantly CF+ and there are also cash buffers in place . Their contribution in order to meet minimum monthly repayments is zero. The strategy is completely self funded and can also run P&I if required . So whether they are carrying $1 million or $10 million - the stress on their household income is the same - nil . How else can they generate a 6 figure income in retirement? They have to use leverage - no one can do it without leverage - unless they inherit money or win a lottery.

End asset value also doesn’t really matter . It’s understandable that you asked - and I realise most forum members still believe asset value is a measure of something , but it’s not really. The luxury I have - the luxury my strategies offer - is that we don’t have to get growth . Growth is nice and all , and it’s certainly very welcome - but we do not rely on it. We are investing for income creation for retirement . So the bottom line is that as long as the properties are debt free and generating 6 figures it doesn’t really matter whether they double in value or don’t increase in value at all. My strategy Is about paying down debt and retiring with a house paid off and a strong passive income - with or without growth. But let’s say they grow 50% in the 13,14 years that the above plan takes . That’s about all I’d be prepared to shoot for as a prediction under these credit conditions . I don’t see prices doubling over that time frame under a 6x income policy

 

Thanks for posting, very insightful and thought provoking.
What areas do you typically look at for these types of property, if you are not comfortable being specific, types of areas will suffice, Capital city, rural etc.

Many thanks

 

I have a small number of NRAS approved 4 bedders in Perth at the moment, and I offer dual occ's in Orange NSW, and occasionally in Bathurst, when we can get a suitably priced and suitably sized Lot - which amazingly is near on impossible . So basically it's Orange.

So what I have outlined in the above scenario is based around real clients, real numbers, and real properties, available today. The numbers are there for everyone to see. Simple. Logical. Potent.

Don't focus on the locations though. Focus on the results. The unencumbered PPOR and the unencumbered INV portfolio producing the strong retirement income stream is the prize. If you have to use cash cows in Perth or regional NSW to get there - that's what you have to do