From a Gonna to a Doer!

Discussion in 'Investment Strategy' started by MudHoney, 5th Apr, 2022.

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  1. MudHoney

    MudHoney Well-Known Member

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    Hi All,
    I feel like I've spent years reading threads on this forum and flirting with the idea of investing in property, but have used every excuse in my mind to convince myself not to. Given the recent boom in property almost everywhere I am kicking myself, and I've realised I think I was a little too risk adverse, but I'm hoping that has changed as I am as close as I've ever been to pushing the button. I've recently spoken to my lender about the possibility of releasing some equity for an investment property (my first)!

    My wife and I own a PPOR we purchased just over a year ago, currently worth around 1.8 million with a mortgage of 1 million. Combined Income of 300,000 a year, 2 dependent kids. No other major debts (we own cars outright etc.).

    The idea would be to look for areas of good long term capital growth for the next 10 years, but not bad rental yield to help us service the loan. However, I have the nagging feeling still, that because we live in an inner Brisbane suburb (Ashgrove), that we should just concentrate on paying down our mortgage with any extra money we may have while it's going hot here!

    I know it's an invester forum, but I am looking for some objectivity here...should I sit on my well placed PPOR and consider it my investment also? Or should I leverage some debt and get in while it's hot!
     
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  2. Trainee

    Trainee Well-Known Member

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    What is your savings rate, what other assets do you have (shares, super, etc)?

    What is your financial goal ($x income from investments by what age) and how does your plan get you there?
     
  3. Todd

    Todd Well-Known Member

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    Welcome @MudHoney. I was in a very similar position now 12 years ago (at age 35 then) and i decided to bite the bullet and buy investment properties. It's a long term game - it is really paying off now - our wealth is 5-6 times larger than what i was 12 years ago - no way i could have done it without leverage - and property is what i understood so i went down that path.
    My advice:
    - bite the bullet and do it - start with an IP that has a decent yield for peice of mind- you will see that after your tax refund, it will probably cost you very little to hold. If i was to buy anywhere right now it would be Perth. Understand the costs and income including the tax rules, it's not hard to work out what the cash flow will be. Factor in some interest rate rises and calculate your position in different scenarios to see if you are happy with the risk.
    - you can still keep paying down the mortgage and invest at the same time - in fact to really build wealth you will need to do both
    - get good a mortgage broker first up - they are worth their weight in gold
    - don't be tempted with apartments/townhouses because the yield is better - buy a detached house
    - get a good property manager
    - no risk no reward is my simple motto. calculate all the risks - then take action!!
    Good luck
     
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  4. MudHoney

    MudHoney Well-Known Member

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    Hi @Trainee,
    We can easily save 3+ grand a month, but currently contribute extra to Super, the mortgage, extra holidays, and live a pretty free lifestyle (not exorbitant, but don't worry about money currently). We are willing to change this if we go with an IP. Shares are minimal (20 grands worth) as we recently sold a principle shareholding in a UK company and used the money to pay down our mortgage. Combined Super is at around 600 grand but we are 44 and 42 respectively.

    Our financial goal is to move to the Sunshine Coast in 12 years time (I will be 56). If needed we will consolidate and sell all assets, purchase a smaller 2 bed unit near the water (but it would be nice to hang onto some investments if possible). I plan to semi retire (move out of Technology career into something less full on) and my wife will continue to work in Senior Health roles until retirement age. While we don't expect to be exorbitant spenders day to day in retirement we would like money aside (most likely from Super) to travel 3 times a year.

    In the short term it would be nice to try and concentrate efforts on building a property portfolio (outside the single IP) to build towards securing that future above. I want to knuckle down, learn, and take some educated risks to try and build a great portfolio if I can.
     
    Last edited: 5th Apr, 2022
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  5. MudHoney

    MudHoney Well-Known Member

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    Thanks @Todd, some comforting advice there! Hopefully in years to come I can reply to this post with positive affirmation!
     
    Last edited: 5th Apr, 2022
  6. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

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    with that size of of non deductible debt, and your tax brackets, investigating an active debt recycle strategy in addition to property investment may produce a better financial outcome sooner

    ta
    rolf
     
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  7. jaydee

    jaydee Well-Known Member

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    You seem to have a lot in Super (for your age) yet a high PPOR mortgage. If it were me I would be reducing the mortgage rather than paying extra funds into super. Also, I would be using the full rental income from several newly acquired IPs to pay down the mortgage even if this meant capitalising the holding costs of these newly acquired IPs.

    This may not seem a great idea in a low interest environment, but it definitely is once interest rates rise.

    In short pay down the mortgage asap, but potentially use the PPOR as security (for LOCs) and to leverage yourself into more income producing investments.
     
  8. MudHoney

    MudHoney Well-Known Member

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    Hi @jaydee , I work for a Superannuation company (higher employee paid benefit) and my wife is in Health (also higher employee paid benefit), but yes we also co contribute...so will look at switching that into the mortgage.
    Thanks @Rolf Latham , is this something you think is easily discussed with my current accountant, or is it a specialist conversation?
     
  9. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

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    Active Debt Recycling is more of a Financial Planner and Credit advice piece than just taxation advice.

    Most accountants arent across the concept to help implement the strategy, but we have found are quite ok to sign off on the tax side.

    ta
    rolf
     
  10. Trainee

    Trainee Well-Known Member

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    You will need to fund your retirement between age 56 and 60 when preservation age kicks in?

    There are a lot of assumptions. e.g. your kids will be financially independent in 12 years.

    Focusing your assets in PPOR and super is ok for when you are older, but not very flexible.

    With that income your after tax is about 20k a month. So 3k savings a month is 15%. Even assuming some is going to super, what are you spending? And would you be willing to suddenly cut that in retirement?
     
  11. MudHoney

    MudHoney Well-Known Member

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    Hi @Trainee , We also pay extra mortgage repayments already (significant), kids at private school (significant cost), extra curricular activities for both us and kids, travel and accom with the kids, and food are our main culprits and yes, we are willing to cut that back in all respects, and talk about this often. Our kids are getting older and largely a lot of this is scaling back anyway as they do their own thing. I left home when I was 15 for boarding school and my wife 12.....so I joke with the kids they're out on their own when they are 17 at a maximum! :D
     
  12. MudHoney

    MudHoney Well-Known Member

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    Ta @Rolf Latham
     
  13. db9

    db9 Well-Known Member

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    My two thoughts if you go ahead with investing is: don't buy because of fomo and ensure you take care with asset selection. You've spent this long planning/ deciding and the good way to protect yourself IMO is being spot on with asset selection for your situation.
     
  14. Trainee

    Trainee Well-Known Member

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    Talking about cutting back and doing it are very different things. It's your life, so you don't need to justify your expenses but if you don't manage to cut back either, it's your retirement.

    Paying extra mortgage repayments 'returns' you the interest rate. Which probably isn't as good as returns on other investments. Super generally doesn't have much leverage, and is locked away until 60.

    Is your plan (which includes the kids being completely financially independent) realistic. In 10 odd years, if the kids simply can't afford to move out or live independently, are you going to kick them out, sell the house and move anyway? Maybe the investment plan should be generational. But that would probably mean a lot more saving now and much more aggressive gearing. And luck, the longer you leave it. If you had started aggressively borrowing and buying investment property at 30........

    Fact is, your net assets aren't great for your level of income, when the last 2 decades have been pretty favourable for investors. Whether you agree is up to you.
     
  15. MudHoney

    MudHoney Well-Known Member

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    @Trainee , yeah they are all worthy statements, I neither agree or disagree really...what others think of me is none of my business. Quite simply I'm not sure whether to continue on with my current life, or invest.
     
  16. Trainee

    Trainee Well-Known Member

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    If you continue the way you are now, will you get to where you want to be?
     
  17. Zbdoh

    Zbdoh Well-Known Member

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    I think you're at a point in your life where the decision you make it quite critical, a good decision "i think" will lead to your achieving your goals, an average/bad decision will derail it.

    I think you would benefit from some professional advice. It shoulds like your income/expenses for the next 10 years are quite clear. So having a property plan made may be a good idea if you're wanting to use property as your investment vehicle. I've had one made by Empower Wealth in Melbourne. They were very professional and created a good plan. Unfortunately my partner and I are in our mid 20s and our incomes/expenses are very different than predicted, so the plan isn't really valid anymore. But in your case I think it would be much more useful. If you don't want to use property there is always a financial advisor, but I'm quite hesistant to take their advice by virtue of their potential COIs.

    Overall you have a likely borrowing capacity of 1.8-2.0M in total, with 1.0M of that being used.

    I don't know the Sunshine Coast market well, but could it be an idea to look at buying that retirement property now and holding it as in IP in the interim. Then when you move you can sell the PPOR tax-free. Refinance the IP to be 100% variable and use the proceeds of the PPOR sale to fill up your offset account linked to that variable loan. Then you'll just need to make the principle payments which should be very manageable. You could then use the remaining funds to tide you over until your each super preservation age. (you'll need to model how much money you'll have at this time form sale of your current house to see if it'll be enough)

    In the interim assuming you have extra cash surplus each month post the Sunshine Coast purchase (if you do it) you can continue to fill your super up.

    This is what I would consider doing. It's simple, takes advantage of the tax management of super contributions, gets your the retirement property early on, and from what I can see doesn't confer a lot of risk.
     
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  18. MudHoney

    MudHoney Well-Known Member

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    Thankyou all for your awesome contributions. We've managed to get preliminary approval to look for an IP (or more ) up to the value of 1 million, but guarantee rental of 750 a week (no stipulation regarding vacancy rate). If the property purchase price goes down the rental yield percentage is allowed to go down slightly as a stipulation to the approval.
    I have extensively read, talked to the accountant and adviser, done some research, talkeed to some agents etc. and have some ideas of potential areas that we could invest in (Perth, and south along the coast - Rockingham, Mandurah etc. , Rockhampton, Nambour, Buderim and surrounds, Logan and surrounds) and need to find the right property at the right yield in the right area for some decent CG. I am in two minds about whether we get two IP's under 500,000 or go for a single under 1 mil. so will continue to research. One thing I am finding difficult is building some kind of relationship with agents in these areas to get intel on pre market properties...a lot of them just don't want to return calls, talk, or follow through. I think I might consider Buyers Agent when I decide on an area/s. Thanks again!
     
  19. Cattails

    Cattails Active Member

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    Hi Mudhoney,

    I think you're on the right track. I have 4 IPs. Two Gold Coast, One Logan, One Toowoomba. My family also constructed a $1m value waterfront property for rental on a subdivided block in the Gold Coast, 4-5 years ago. Block was bought 20 years ago at $500k during GFC. Now constructing the second house.

    My rule of thumb was always to get at least $100 per week in rent for each $100k of property value. This works out to a 5.2% gross yield. Harder to find now since this last two year runup.

    I would prefer two $500k properties over one $1m IP.

    So many more potential tenants at $500k. And I just feel like there's more room to move up in price appreciation.

    In a downturn, everyone still needs a $500k house. I worry about vacancies for $1m+ properties in recessions. We struggled for several months to get the $1m property rented at $950 per week 3-4 years ago. Probably much easy to rent a $1m property quickly in the current market shortage.

    Our waterfront properties now worth $1.5m each. Maybe could get $1,100 or $1,200 a week. But in GC has to compete with a bunch of people who don't want to sell their $2m waterfront home, but will try to rent whatever rent they can for it. I don't like this high end market at all. Feels higher risk, lower yield, for what benefit, if any at all. These were originally $1m waterfront properties 7 years ago, and I'm even less fond of them now at $1.5m, in terms of yield, and vacancy risk.

    People often recommend 1st IP in a capital city. Hard to go wrong there. Toowoomba is very nice however, and has not had the insane runup the rest of SEQ has had, and is growing consistently. Loved living there and our IP there is doing fine, albeit up 10% in the past two years rather than 30% in GC.

    On another note, paying off your mortgage faster only provides you the annual return of your current interest rate, say 2-3%. An IP, extra money in super/stocks (long term) would both likely provide higher returns than paying off your mortgage. Stocks scare me with anything less than a 10 year investment timeline though.

    Solar panels often have about a 5 year payback, and then 20% return if you don't have a heap of those onroof yet.

    Anyway, good luck.
     
  20. MudHoney

    MudHoney Well-Known Member

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    Thankyou ! All good info I will take on board