How far along are you ?

Abandoned ship before financial goals reached - sold one, quit job, moved country. Different goals now.

 

Exit the rat race on property last year. Currently building at the moment.

 

If you'd asked me 3 or 4 years ago, I'd have told you that paying off my non deductible mortgage in Sydney and having 3 or 4 good quality INV properties in Sydney would have been very satisfactory.

Today - non deductible Sydney mortgage is gone. Have 4 other great Sydney properties (Merrylands, Mt Druitt, Castle Hill NRAS and Elanora Heights NRAS ) and have NRAS properties in Orange, Dubbo, Bendigo, Ballarat, Windsor (the Qld one) Alderley and Mt Gravatt, with 2 others still to settle in Port Macquarie and another still to settle in Goulburn... and may squeeze a couple more in ....

Portfolio already generates over 100K tax free CF+ just from the NRAS side of things, and that will increase annually for the next decade. Add a completely tax free 200K salary income to that ( because of the significant deductions my portfolio produces) and I will be in a position to build a significant pool of money during the next 10 years. Perhaps as much as $3 Million, tax free - which I will have reinvested and turned into quite a bit more ( hopefully)

So I intend to maximise the tax effectiveness of the portfolio for the decade by squeezing all the depreciation and pre tax cash losses from them first, before they cease to provide those benefits any more. ie when NRAS ends and depreciation diminishes . At that point in time ( 11 years from now ) the properties will revert from the 20% discount and back to full market rent and I only need them to average 3-4% annual rental increases across the next 10 years to comfortably reach post NRAS yields of 7.5%-8% pre tax - so its likely they'll all be CF+ or very close to it by Year 11- unless interest rates have gone higher than 8% of course. At that point in time I intend to pay down all or most of the debt ( @ $4 million vs a value of @ 6 Million ) , meaning I'll hold an unencumbered or very low LVR portfolio with a more than adequate passive income for life .

RE the income for life - Annual rental income from the portfolio is currently @ just a little more than 160K per annum - after applying the 20% NRAS rental discounts. That would be @ 220K in today's money if no NRAS discount were to apply. So I think it's reasonable to feel that the market rent will reach 290-300K + within 11 years. Just 3% compounding increases across the next decade would just about get me there. Then allowing for costs ( management, rates, water, insurances etc) to also inflate at 3-4% from today's average of 5K per dwelling to @ 7.5K per dwelling, I should be able to run the portfolio for a little under 100K in total if the loans have all been paid down. That should leave me at least 200K passive income. And that's using pretty conservative numbers. So I will more than likely NEVER have to sell anything and have a passive income of @ 200K for life (perhaps more) within 11 years.

This is the power of NRAS cash flow when understood and deployed correctly.

Whether I'll want to continue investing beyond that ...I don't know. I will certainly have both the equity and borrowing capacity to increase the portfolio significantly if I chose to.

But whats the end game? $2 million in the bank? $4, $5 million in the bank? $100K passive income? $200K passive income? For me, a multi million portfolio with 200K passive income seems like a pretty satisfactory result right now - but then again.... if you'd asked me 3 or 4 years ago......

 

I keep going to type "19 weeks", but realise that is going to bring me nothing but pain.

I'm very impressed by your story.

 

Under the right circumstances everyone can do something similar, customised to suit their particular income levels.

Starting with the understanding that each NRAS property will typically produce 18-20K of deductible losses and 8-10K of surplus tax free cash flow, for marginal tax rates of 32.5%, 37% and 45%, and @ 5K CF+ for Marginal Tax rates of 19% - it's simple maths to plan a highly tax effective dividend reinvestment plan using property.

If you are on 100K - you would want to consider 4 x NRAS. That would produce @ 80K of losses, effectively reducing your 100K taxable income to 20K ( so basically, tax free) and you'd also see a surplus of @30-35K from the 4 x NRAS. Total after tax income would go from 100K taxable to 130-135K tax free.

If you were on 80K, you'd want to consider 3 x NRAS. That would produce @ 60K of losses, effectively reducing your 80K taxable income to 20K ( so basically, tax free) and you'd also see a surplus of @22-27K from the 3 x NRAS. Total after tax income would go from 80K taxable to 102-107K tax free.

That's how you use NRAS to manufacture the maximum cash flow you can for YOUR particular income level, which you then redeploy to aggressively reduce non deductible debt and move towards a very different financial position in just 10 years, with enormous cash flow and equity with which to continue to invest, should you wish to. Or sufficient cash flow to retire debt free, early.

But you need to make sure you have the equity to fund the deposits and stamp duty ( and a 10K buffer per property) , PLUS the borrowing capacity to complete the purchases ( assuming 7.5% assessment rates) to get started. That's the "system" all of my clients use.

If you are fortunate enough to have a significant amount of equity where you are able to provide 20% + Stamp Duty + buffer for each purchase, you can bypass the APRA constraints and use the Adelaide or FirstMac NRAS policies to supercharge your capacity.

But restructuring finances to organise cash outs takes time, and there are now VERY few NRAS opportunities left. VERY few. So anyone looking towards this strategy in the post APRA world, really needs to transact rather than procrastinate.

The questions to consider are; do you believe the APRA changes are going to go away or stay? And if like me you believe they are here to stay, how are you going to negotiate the servicing wall that you have either already reached or will soon reach? Do you really truly believe the capital growth story of the next decade will remotely resemble that of the last 2 decades, given the APRA constraints? Or do you accept that a debt reduction strategy will be the most effective and safe way to navigate the next decade or longer?

 

Yes, I believe APRA is here to stay.

CG story only works if you actually jump into markets that are rising and will make you money, get it wrong and you could go backwards quite easily.

Agree, debt reduction is effective and safe strategy moving forward. However, I don't think everyone gets this because they are too focused on accumulating negatively geared properties in the wrong markets

How is APRA effecting NRAS properties??? Nut and bolts if you don't mind sharing

MTR

 

NRAS has always had 20% less rent used for servicing and that hasn't changed, so the impact is really only the post APRA assessment rates, and that affects all debt equally - NRAS or not.

But the advantages of 80% LVR deals done via Adelaide Bank ( via Mortgage Managers) or FirstMac - where in both instances you can use 80% of the NRAS credit as "untaxed allowable income" on their calculators - certainly stands out even more now. It adds $8773.60 of untaxed income, per NRAS property . That's like an 11-12K taxable pay rise .

There are some limitations around this though; Adelaide Banks policy is only accessible via Mortgage managers - you cant get it from Adelaide Banks retail channel, and they will only accept vanilla completed houses. FirstMac will take apartments, townhouses and houses, but you have to give them your PPOR security if you want access to the supercharged NRAS calc.

So if you have large quantities of equity, the best way to approach it is - move your PPOR to FirstMac, then do stand alone 80% NRAS deals for your NRAS purchases using FirstMac. ( or Adelaide via MM's if they are houses)

This is why it's really important to review your equity position, then your borrowing capacity position FIRST, before commencing on an NRAS purchasing plan. It's why I don't let anyone see a property until they have spoken with me or their own broker at length about their budget, their buying power etc... and then I match properties to that budget, ensuring a buffer is always in place.

Get the ducks lined up in the right order - execute the plan in the right order and you can make really significant inroads into improving your cash flow position - and then set about reinvesting that surplus cash flow towards debt reduction. Dividend reinvestment /mortgage reduction / portfolio building all happening simultaneously, so that you open up further possibilities in years to come.

 

Thanks for sharing.

Don't want to derail the thread but I believe this is part of Skater's strategy, she mentioned she purchased 3 NRAS properties, without these perhaps it would have been very difficult to retire when she did???? Tweaking it to make it work, perhaps this will help others in their endeavour to get there earlier.

I think resi property is very slow and the notion that people will retire on 100K pa wont happen unless you are prepared to do something outside the square ie developing, flipping, NRAS etc etc.etc.

 

It's precisely what I have been saying for the last 3 years - the era of credit expansion had to come to an end and accelerants were going to be required to replace the growth that will no longer be able to replicate previous cycles, where credit expanded rapidly and rates fell rapidly and incomes increased rapidly. All of the big 3 ingredients are now inverted. Rates are already ultra low so not much more ketchup left in that bottle - and even if they fell, assessment rates will not. Credit expansion is now ended and likely to get tighter . Incomes are not growing and the economy is not going to deliver significant increases to standards of living as we transition from the mining capex boom to ... well... what are we transitioning to?

Investors have just lost 25-30K of income per $1Million of debt, on every servicing calc in the land ( bar a couple who may continue to take "actuals" for a month or two more) so I would urge investors who have only commenced their investing in recent years, and who are relying on big growth to reach their goals, and who have failed to understand the role credit plays, to rethink.

It's understandable they have ignored the importance of credit, because more and more money has always "just been there" for the past 20+ years. So instead, they have been convinced by the old arguments of location and immigration and dwelling shortages being the drivers of prices, when it was always really credit that was the real oil fueling the engine all along. The old saying "you don't know what you've got until it's gone" .... but even the heavyweights on here , with mature portfolio's , are coming to realise what the end of the expansionary credit policies really means for portfolio building, and why cash flow/debt reduction is now very important. 10 years ago NRAS was not the tool for the job. Now it is .

We will possibly even see a short run of price rises in Brisbane, Melbourne, Adelaide, Perth, Regionals... just about anywhere entry prices ( and loan sizes) are far lower than Sydney - but that will be short lived and the capacity wall will eventually be reached there as well... and when borrowing capacity for even the cheapest stock in the land is exhausted , once again all roads will lead back to - debt reduction being king

Ultimately - having accumulated a $6Million + portfolio,and assuming ZERO growth ( I believe I'll get some growth, but I model on an assumption of ZERO) if I can pay it off and have a net worth of $6Million with a passive income exceeding 200K, without relying on growth... VS going with $6Million of non NRAS, running CF neutral at best (while rates are this low), and hoping the portfolio doubles... requiring me to sell off 2/3 of the stock to clear the debt and pay CGT. I'd end up being left with 1/3 of the stock and have a $4million portfolio ( 1/3rd of $12 million - IF the $6Million portfolio doubles ) earning me less than 1/3rd of the rental income I'd be earning from my NRAS strategy - where I'd not have needed to sell any stock to clear the debt - avoiding CGT costs.

Now, if I'm wrong about growth and it does double... I'll have a $12 Million portfolio, no debt , not have sold anything, paid no CGT and will have a passive income 2/3 larger than the other guy.

All the anti NRAS arguments in the world cant escape those maths. In a post APRA world, where would you prefer to be positioned?

 

No......Skater's strategy is, and always has been, bread & butter, high yield properties. I don't like negative cashflow. Now, I'm not saying that I've never had anything with a negative cashflow, but I've always had a mix of outer area City properties and Regionals.

We decided to sell some of the older stock and buy some newer stock. Less maintenance going forward and more depreciation. The NRAS properties fit the bill with the added bonus of the tax free payment, but there is only three of them. Hardly enough to retire solely on their income alone. Add to that, that we will only get a small partial payment for one of them this financial year, as the date that they calculate the payments is in April, and gets paid later in the year. Only one was built & tenanted by April. Next year we will get one full payment & two partial payments. It won't be until the year after that, that we see all three payments.

We were able to retire by doing several commonsense (I believe) things. Firstly....no nondeductible debt. Second....we don't require sheetloads of cash to maintain our lifestyle. We don't live the high life, and we never have. Third....equity, lots of it, tucked away for a rainy day. And finally, as we concentrated on cf+ properties, right from the beginning, rents naturally increased, but the mortgages didn't. For instance one property we bought for $67k now has a loan of $42k and rents for $190 pw. Another....our ex-PPOR only has $95k (I think) owing on it. The rent on this (2 houses) comes in at over $600pw.

I like rent increases.....this week I just gave us a $40pw pay rise by putting up the rent $10pw on four properties. I put the rent up as often as I can, even if it's just $5pw. I know that sounds petty & small, but $5 over 5 properties is $25pw, over 10 it is $50pw, and over 20 it is $100pw, so as you see, the more properties you have this can be quite powerful.

 

I keep changing the playing field. So much so that we don't recall the game that we were playing.

 

thanks for sharing

 

Thanks Skater. With those purchase prices I can see very long term property investing. I think by reading your post, what worked for you is being in the game long term, great yields making it easy to hold and not selling on every boom is the basis of your success.

 

... what I have been banging on for a long time. There was sell down after boom cycle, therefore reinvesting profits, a very big one. Strategising and managing debt makes a big difference moving forward and make a difference on how long in terms of years it will take to reach your end goal. Comes down to increasing cash flow

 

Will always buy when there's profits to be made in any asset class.

 

I chose the second last but this is where I am personally. LOL

 

Don't think there could be a target number of or value size of portfolio in mind. It's like asking someone who has certain amount of savings, whether he's done in growing that any further. Rather, the question is, at any point in time, what risk are you prepared to take to grow the pie just that bit more.

 

My end goal... ps. I currently have an IP for each niece and nephew. All with mortgages of course. But I can't stop accumulating just yet...

 

Did you really post that where the nieces/nephews (or their parents) could see that???

 

Parents yes. Kids... Dont go on facebook. Nothing wrong with that. Its a goal.
If you write a goal down its more likely to happen.
There's an accountability factor added too if you share it with somebody.
(I wrote my personal and work goals down at work in a personal email to myself over 12 months ago and I review them every now and again and modify at times.... but this is very long term goal and I am determined. This is something I plan to have).
And anyway... they are my nieces and nephew.