How are we doing? Advice sought.

Hi all,

I am a regular poster on here, but in a different name. I don't feel comfortable posting the personal information I'm about to, as certain people I know browse this site, and wouldn't have a clue who I am under this name.

I'm curious as to what your thoughts are on how we are going on our investment journey, and ideally, what you would do to accelerate the growth if you were in our position.

Info about us:
31 yo couple with 1 young dependant. No plans for any more kids.
My PAYG income: $110k
Wife's PAYG income: $172k
Combined IP income: $765/wk (before any costs)

My PAYG income should grow at an average of $4k/yr for the next 9 years in my current position. I am going to start studying again shortly to get a higher position in a couple of years, which should see a $12k bump, then a slightly higher yearly increment.
My wife's PAYG I'm not sure about, but her boss is very generous - anything could happen.

Our properties:
PPOR valued roughly $1.3m
IP1 valued roughly $370k
IP2 valued roughly $430k

We intend to live in our PPOR forever.

Our loans:
PPOR $500k with $55k in offset P&I @ 3.65% ($2270/mth)
IP1 total $383k IO @ mainly 4.19% ($1350/mth)
IP2 total $403k IO @ mainly 4.19% ($1400/mth)

Apart from daycare fees and loan repayments, we really don't have very high expenses or spending habits. As such, we are easily paying $100k off the PPOR loan per year at the moment, even after a $15k holiday we have planned. We drive cheap cars that cost nothing to run.

Our current ultimate goal:
$75,000/year in today's money passive income, before I'm 55.
I realise this is $1,875k debt free @ 4% before tax and fees.

Our current plans, which we're happy to be picked apart and made better by any suggestions:

Today: Keep paying as much into PPOR offset as possible, whilst still enjoying a yearly holiday ($20k max bi-annually) which we are starting this financial year.
October 2019: Have the PPOR loan offset filling up, to have <$350k owing.
-> At this stage, buy IP3 in the range of $400-550k, servicing dependent.
March 2022: Have the PPOR loan offset filling up, to have <$100k owing.
-> At this stage, but IP4 in the same price range, servicing dependent.
February 2023: Have the PPOR offset completely (realistically, this should happen before this date at our current rate), and start filling up the offset of the IP with the highest rate.

Some non-negotiable's set by the wife:
$70k family car when the PPOR is offset - will save up and pay cash. It's her gift for us working so hard towards paying it off. I'll keep my shi77er until it dies, then get another shi77er.
Extensive reno to PPOR to make ultra modern inside at some point after PPOR and car.

I haven't done a spreadsheet yet to determine whether this is actually possible or not (its on the cards when I'm on leave soon), but by basic assumptions, I feel like it is considering income should rise, and the massive daycare expenses will more than halve once the little one is in big school in 2020.
Our snowball is really only 4.5 years away from being pushed.. and it feels REALLY slow at the moment because we're realistically just 'saving' into the offset with little growth.

As such, I'm posting this to get insights on what you all think about how we're doing, and what you would do differently to better the plan/process. I'm all ears, and like most - here to learn and get better.

 

You haven't got far to go.

Offsetting the main residence loan rather than paying it down is costing you money. Consider how much of a buffer you will need.

Consider selling an IP or two in years ahead and use this to debt recycle into the main residence loan and buy another property. Plan ahead you could even have a sacrificial main residence which you could dispose of tax free after some capital gains.

This could speed up reaching your goal dramatically.

 

Thanks for the reply, Terry. I feel like I have forever to go haha.

What do you mean by offsetting the main residence rather than paying it down is costing us money? Do you mean in terms of debt recycling?
We intend on debt recycling once we get to the $350k mark - pay from the offset into the main residence loan, then split that amount for the deposit of the next purchase, leaving a small buffer.

We're waiting that long for 2 reasons:
a) The wife has it set in her mind that all debt is bad debt. I'd buy another IP tomorrow if servicing was good (haven't checked recently), but we've come to a compromise that we can buy when the PPOR debt is down to $350k. She feels safer at that level.
b) I haven't checked servicing, and won't until it comes to the time of wanting to buy. I don't feel it will be an issue though unless there is more tightening.

Hopefully the current IP's grow enough to be able to sell and debt recycle enough. Unfortunately I don't see them growing all too much more than about 4%pa until 2020. Hopefully things happen for the areas then.

We also intend to become clients of yours to determine the best strategies forward before we go through this process, so maybe June next year if you are taking on new clients again, I'd love to come and have a chat. (We will stick to our current broker from here though, sorry ). I've read pretty much all your tax tips, and very grateful for them.

 

Check out this one

Strategy: Don’t Keep Large Sums in Offset Accounts Strategy: Don’t Keep Large Sums in Offset Accounts

 

Quick question.

Back of a napkin math.

You spend 5k a month on your 3 loans. So 60k a year.
100k off loan (assuming roughly 15k is principle from the standard repayment)
That’s 145k
15k holiday takes you to 160.
Childcare for you is probably 200 days a year at 140 a day, so about 28k a year.
Takes you to about 180-190k.


280k total income, which is probably slightly under 200k after tax. Let’s assume afrer cost you get about 32k from the investment properties.

So you live off less than 1k a week. Which is pretty good for 2 cars, 1 kid. Two people moving to and from work, bills. Etc.

If I was you I would play more defense before offense. If one of you was to lose your job, you would basically whipe our all your ability to save or invest. Especially if it was your wife.

You young. You have 2mil of property exposure. I would pay down debt and diversify into stocks or something before adding more houses.

 

With that kind of income, your ages and modest goal and timeframe - its easily attainable. Personally I would not leave real estate. I would keep investing in good deals within your risk profile and hold. I would also make sure you have a decent cash buffer.

 

Btw. There is room to max out both your super contributions to save tax. Do that. You can basically invent the best part of 10k a year in tax savings. Since you have high incomes you won’t miss the money.

 

personally.. i wont buy more investment property..you have 3 property. at your current exposure of $2m all in one asset class in same country (not sure if it is the same state).

you need diversify.

shares will be the easiest... if u not into stock picking.. just buy ETF's and LLC whcih every float your boat.. i prefer etf, other prefer LLC.. they pay u divided just like your properties, at much lower cost and franking credits if you hold aussie shares.

just remember they are like investment that you should keep for a while.. they are not for "trading".


dont put all ur eggs in one basket.
especially if you want a good retirement. like u mention

 

I will take the Warren Baffett approach that you should Invest in things you understand. Diversification lead to mediocre results more often then not as I have learnt the hardway earlier on. If you like and understands property, you could consider interstates and different property types. Each states has its own property cycle so you can always find good value for money properties. This way not all of you eggs are in a single basket geographically speaking.

If i am in your shoes, I would leverage more to buy the next property but keep sufficient buffer in the offset to see you through a lengthy downtime such as unemployment.

 

100% agree.

I have found the best results most often comes from investing in things you understand and if possible, are able to get an edge in.

All the great investors are able in some way to get themselves an edge. I stick mostly to real estate because I know I have an edge with this asset class over most others.

 

Thanks, Terry.
I did look into this, but the rate difference would be 0.05%. Unless I made the new split P&I instead of IO.

We really don't spend much at all. Take out daycare, and we'd spend a lot less

I don't really understand shares. And the returns just don't make sense to me considering the loan interest. But again, I don't understand them. I'm no pro in property, but understand it a lot better and feel a lot safer in it.

At what point, in my shoes, would you invest in more property? My wife wants to pay another $100k into the offset before we look at the next property. This will mean the PPOR loan is essentially <$350k. It's the only non deductible debt we have.

I do have $2.1m in property, but a bit over $1.2m in debt. LVR isn't too bad at this stage.

I do like real estate. I'm always looking out for deals, but don't act on them yet. At least when the time comes, I'll know what I'm looking for and be ready to pounce.

PPOR is in Sydney, IPs are in QLD. I intend on buying the next IP in a different state.
I'm not all that confident with shares..

Thanks, that's what the goal was
I'm somewhat confident we are on the right track.

 

Might sound rude. But “I don’t understand shares is a terrible answer”

Go buy the barefoot investor. He covers enough to give you a baseline. Then once you have done that we can give you other reading.

Educating yourself is free. You may as well try it rather than ignore the possibly of other gains.

 

Good point. Once I didn't understand how to drive...

 

Thanks for sharing your current position it looks like you are travelling along nicely. If you wife is a bit more conservative when it comes to debt then now looks like a good time to consolidate a bit and build up the PPOR offset, knowing you have good cash in your PPOR will help her sleep night it seems based on your comments. Its important you are on the same page when it comes to deciding when to buy again. If you do end up doing some consolidation you could take the chance to put a little bit of money into shares, having skin in the game seems to speed up the learning process I find, and atleast unlike property to a certain extend you can put as much or as little as you like into it.

 

How much buffer should be kept for investment loans totaling $2milllion (no PPOR)

 

Some think 6 months of repayments should be kept as a buffer.

 

how good is life with all the good sides and none of the bad In all seriousness, regional areas are likely to respond to the Sydney downturn the same way it did after the previous boom back in 2003/04.

its difficult to quantify as its more depended mainly on your spending habits and other liabilities. good rule of thumb is atleast 6 months of total outgoings. I have about 2 years for good measure as I have a very young family that depends on me.

 

Not rude at all - happy to hear whatever people have to throw at me, regardless of how it sounds, as long as its constructive.
I have read the barefoot investor. Was very basic info, and didn't really give me anything I didn't already know. Excellent for a complete noob though.

To be perfectly honest, I did dabble in the shares right after the GFC. And I made a little bit of money.
Today, I have a nominal amount in non dividend shares which I purchased in December '17 just to play around with.

I should read about shares. What would you recommend?
I do enjoying learning, and when I pick up a book, I find it hard to put down.

Most of the shares I've looked at, just don't make sense to me. The dividends that you get paid appear lower than the cost of the loan. That's the main thing that I don't understand about some shares people recommend. But, there may be something I'm missing.

What shares would you recommend I look at if I were in a position to purchase today?

 

Bogleheads guide to investing.

It’s by Taylor and some forum guys. Will change your thinking.

 

in simple terms high risk high return.
but

warren buffett also can negotiate and blackmail bank of america and have access to companies long before the public at a price that is only available to a hand full of instituional investors.

Warren buffett can lose 60b and still have many Billions to live comfortably, he can afford the risk.

many mom and dad investor cant afford to lose $100k, let alone millions.

everyone's risk profile is different, unless you know what you are doing safe is better than sorry.

if u know what your doing.. buy all means..all in.

if you talk stock market, you should know everyone makes multiple bets.. you lose some and you win some.. but even if you lose 9 and win 1 in 10 bets, the 1 will run so long and so high it out weights the 9 that you lose.

this edge you speak off.

dont think many people know what is it in the property market of australia.

just buying in the bull market.