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Hi I'm Rixter and this is the IP Strategy I used to Quit Work

Discussion in 'Introductions' started by Rixter, 25th Jun, 2015.

  1. Rixter

    Rixter Well-Known Member

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    Portfolio Perth Brisbane Sydney Melbourne
    Hi, I’m Rixter and discovered SS back in late 1999.

    I’ve been investing for the past 15 years after reading the book ‘Building Wealth from Residential Investment Property ’ by Jan Somers, some years beforehand.

    We started actively investing in 2000 and hit it pretty full on, basically purchasing a property per year over the course of the following decade. Some years purchasing none and other years purchasing two depending upon financial circumstances and existing portfolio performance at time of each IP purchase.

    To date we have built a substantial size multi-million dollar residential property portfolio spread around Australia, which has afforded me the opportunity to fully exit the rat race last year.

    The capital growth averaging (CGA) strategy I deployed utilises a regular purchasing cycle similar to what dollar cost averaging is to the share market. The major underlying principle to its success relies upon your "time in" the market, not "timing" the market and revolves around the purchase of townhouses and villa’s.

    As such the idea is to purchase good quality, well located property in high density areas (metro area capital cities), at or below fair market value, as fast as we could reasonably afford and then hold them long term in order to realise the compounding CG across the portfolio.

    We chose to purchasing near new property over older style for the following reasons, in no particular order:

    • To maximise non-cash depreciation deductions
    • To minimise maintenance & repair costs
    • More modern & attractive to tenants, thereby minimising potential vacancy rate
    • Attract higher rent, thereby maximising yields
    Without getting into the "which is better debate, houses or Units", our preference is for townhouses & villas with a 30%(of lot) land area courtyard thereby eliminating high rise apartments that only have balcony's, for several reasons in no particular order:

    • lower maintenance & upkeep for the tenant
    • lower purchase and entry level into a higher CG suburb
    • rapid growing market demand for these type properties - one of the largest groups being the Baby boomers coming into their retirement years and having to downsize for financial & lifestyle reasons.
    • greater cash and non-cash tax deductions in relation to IP purchase price, therefore maximising portfolio cash flow.
    • able to hold more IP’s across our portfolio - thereby minimising suburb over exposure risks and maximising portfolio compounding CG exposure across increased multiple markets.
    Early on in our journey we looked to purchase in metropolitan suburbs with a 7% historic CG that were approved for and/or were about to undergo gentrification...and that allowed us exposure to short-middle term CG to leverage against faster. I looked to where the government, commercial, retail and private sectors were injecting money, which ultimately beautified and uplifted the overall feel of the area.

    This in turn attracted people wanting to purchase, thereby creating demand and putting upward pressure on prices. It also increased our rental yields due to the demand of people wanting to rent in these areas as well.

    Later purchases we targeted metropolitan satellite cbd’s. We found these is be very good consistent CG areas with main arterial roads in/out of the suburb, public transport hubs, major shopping precincts, with high employment, good educational, medical & recreational facilities.. All the things people want to be located close by to and/or within easy commute.

    During the portfolio acquisition stage all portfolio cash flow we serviced via wages, rental income, the tax man, equity via LOC’s and/or Cashbond structure, and any other form of disposable income we had available.

    Prior to rat race exit we refinanced and topped up all our LOC’s to a sufficient level to maintain an available balance of 10 times our annual lifestyle expenses, plus the capitalisation of interest costs to fund lifestyle over that decade period also .

    The easiest way to explain what Im meaning by all this is to provide a basic example as shown below.

    For ease of calculation let’s say we have accumulated a $4 Million portfolio, structured for CG with 67% LVR that is cash flow neutral/+ . Additional to this we have a lifestyle budget of $1000 per week.

    The calculation would look like this and excludes adjustment for inflation:

    • $1000 x 52 weeks = $52k.
    • $52k x 10 years = 520k.
    • LOC Interest on Interest capitalisation for $52k per year over the decade @ say 6.5%IR = $181k
    • So the equity required to LOE over the course of the following decade = $701k (520k + 181k).
    Portfolio Position Start of LOE Harvesting Stage.

    Value $4,000,000 less $2,701,000 (67% LVR inclusive of $701k available & undrawn ) = TOTAL $1,299,000 equity(buffer)

    Portfolio Position after 10 Years of Lifestyle Harvesting.

    Value $8,000,000 less $2,701,000(debt) = TOTAL $5,299,000 equity

    Example on the cash flow component and use a very conservative 5% rental yield on the above example $4,000,000 asset base, with a 6.5% bank interest rate, starting the LOE harvesting phase.

    • $4,000.000 x 5% = $200,000 rental income.
    • $2,000,000(debt) x 6.5%IR = $130,000.

    At the completion of 10 years Lifestyle Harvesting

    (assuming portfolio CG 7%)

    • Portfolio Value = $8,000,000
    • DEBT TOTAL of $2,701,000 x 6.5% bank interest = $175,565.
    • $8,000,000 x 5% conservative rental yield = $400,000.
    • $400,000 minus $175,565 = $224,435 cash flow positive (less ~ 1% portfolio outgoings)
    After 10 years if one doesn’t meet bank DSR requirements for LOC top ups for the next 10 year round – there’s the option to sell down a portion of portfolio to pay out the $2,701,000 debt and LOR with a $5,299,000(less cgt & costs) mortgage free property portfolio .

    Anyway that’s the basic big picture of the investment strategy(including part contingency plans) we’ve used over the past 15 years.
     
    Last edited: 27th Jun, 2015
  2. clint05

    clint05 Well-Known Member

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    Wow! Very impressive.
     
  3. Samten

    Samten Well-Known Member

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    Hi Rixter
    Thanks for sharing. I am new here but have read lots of your posts on ss and am grateful for your very useful s/sheets. Looking to purchase our first ip very shortly.
    Great to actually see your strategy and receive advice from someone who has been there done that.
    Keep up the good work.All the best.
     
  4. Lollie

    Lollie Active Member

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    NSW
    Great post Rixter, thanks for sharing. Interesting strategy. So would you set up a LOC specifically for living expenses then a separate LOC for all the property expenses? I'm assuming you would have other sources of income/savings to pay for the big ticket items such as cars,holidays,household items etc.

    The portfolio would need to be huge providing continued capital growth and rental increases in order for it to fund both property and living expenses which also increase over time.

    Then, I suppose with a huge portfolio selling off some in retirement isn't such a big deal.

    well done :)
     
  5. Azazel

    Azazel Well-Known Member

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    Nice, thanks for all the info Rixter. Some different concepts there, like harvesting. I'll have to read it a couple of times to digest it all.
     
  6. Patamea

    Patamea Well-Known Member

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    Inspirational Rixter
     
  7. keithj

    keithj Moderator Staff Member

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    The accumulation phase is great stuff - well done.

    However IMO the LOE phase has some serious flaws. You may like to revisit the calculations - there appear to be some basic errors in both the figures & also (IMO) your assumptions.

    And it would be good if you could go into detail about some of the serious risks associated with your implementation of LOE.
     
    hobo likes this.
  8. MRO

    MRO Well-Known Member

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    This is my plan. Accumulate, add value, wait for CG and rental increases and then draw down to retire. Thanks for the further inspiration, great to see the strategy in practice.
     
  9. roberto

    roberto Member

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    Hi Rixter,

    Do you include your PPOR as part of your portfolio?
     
  10. Travelbug

    Travelbug Well-Known Member

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    Love it Rixter! I read your story a while ago and it inspired me. I keep thinking I should work a few more years to get my cashflow up a bit more then I look at the CG each year and think WHY??? Might take a leaf out of your book.
     
  11. Investig8

    Investig8 Well-Known Member

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    Exceptional as always Rick. Keeping it tight and not like the current info/marketers BS out there that want play everything at current IR levels of 4.5% with a consistent 8.4% certain growth.

    Nice work. Now I just need to up the cost of living to accommodate all those bloody cruises I will have to go on.:D
     
  12. The Silver Bear

    The Silver Bear Well-Known Member

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    Would you be so kind as to spell some of these flaws, errors and faulty assumptions @keithj ?
    This is the clearest exposition of this strategy I have seen, and given it's a strategy I intend working towards very shortly it would be great to hear clear reasoning behind both negative and positive opinions.

    Rick, thanks, great stuff as always.
     
  13. DaveM

    DaveM Adelaide Buyers Agent & KFC Strategist Business Member

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    So your retirement plan is basically "property doubles every 10 years"... sounds dangerous to me
     
  14. skater

    skater Capitalist Premium Member

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    Rix, I know we've talked about this before, but I still agree with DaveM. I truely hope that you haven't pulled the plug too soon, and it is for that reason that I've been a complete b@#ch and not allowed Hubby to retire until I'm certain that the whole house of cards wont come tumbling down. I've basically structured ours so that even if there's NO CG in the future, we will have plenty of income from LOR.

    Let's take a look at our portfolio.

    Firstly, I don't do units or townhouses, unless it's a 'too good to miss deal' or it's the whole block. I buy in outer suburbs of CBD's, and they are often lower cost homes. Not only is the purchase price usually lower, but the yield is often higher. They are no frills places that are easily rented, no matter the economy. Rental demand is usually quite high in these areas. I also buy high yielding properties in regional areas.

    Now, I like to keep the real numbers private, so I'll use yours instead.:D

    Your portfolio of $4M, but my LVR is more like 50%, and my average yield is a lot higher due to the few regionals. Throwing in a few NRAS properties into the mixture as well there's an additional $30k tax free for the next 10 years. We've also topped up all our loans and have a tidy amount tucked into offsets, just like you, but we don't plan on drawing on this AT ALL. Well....unless I want to buy more property, which is a possibility.:D

    By selling a few down, our portfolio will return around $68k first year, $98k second year cf+. If this isn't enough income we still have another 5 Sydney properties as well as a heap of other 'stuff' all over the country, including Brisbane & SA, (with a large chunk of equity), that we can sell.....but I don't think we will need to at all.

    So, at the start of October, after Hubby retires, we will be drawing a decent wage from the rents alone. Split between us, there will be negligible tax to pay, and as we own everthing, we have very little in the way of expenses. By the following year, after the NRAS properties come on line properly we'll be able to add another $30k. As most (but not all) properties in the portfolio are older, they don't have a lot of depreciation, but the three new ones do.

    We won't need to be drawing any funds for 'lifestyle', so we won't be relying on properties growing in value....although, of course, they will over time.

    Also, as we will be keeping well over double digits of properties, the income will continue to grow substantially.
     
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  15. mrdobalina

    mrdobalina Well-Known Member

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    Hi Rixter, have you considered developing townhouses or units, instead of buying them? Gives you the bonus of generating immediate equity.
     
  16. Ace in the Hole

    Ace in the Hole Well-Known Member Premium Member

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    There's a good idea :)
     
  17. keithj

    keithj Moderator Staff Member

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    I want to give Rixter an opportunity to revisit his figures, risks & assumptions.

    I don't think this thread is the right place to critique the LOE scenario presented above - I'll post my comments elsewhere.

    And just to repeat, I commend Rixter on his achievements in the acquisition phase of his portfolio - I just wouldn't want to see anyone taking what I consider to be excessive risks based on what I perceive as overly optimistic assumptions.

    [EDIT]I see he HAS made some edits to his original post[/EDIT]
     
  18. pinkboy

    pinkboy Well-Known Member Premium Member

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    Any shortfall of living expenses can be topped up by his working wife's income in the short term anyway.

    pinkboy
     
  19. skater

    skater Capitalist Premium Member

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    THAT wasn't mentioned!
     
  20. Biz

    Biz Well-Known Member

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    *Drops mic*
     
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