Hypothetical 5 Million Dollar Question! Assignment/Discussion

Discussion in 'The Buying & Selling Process' started by Jebi6a, 9th Feb, 2016.

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  1. Jebi6a

    Jebi6a Member

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    Hi To All,

    Long time reader, first time poster!


    Had an assignment/discussion through a course I was doing in finance/financial planning on how to best invest $5 Million cash in todays economy (stocks, bonds, cash, RE, and so on)

    You are still working your current 9-5 job and have no debt elsewhere. The one rule was the portfolio could not be negatively geared. (zero was ok)

    So thought I'd change the question a little and relate it to property as it was an interesting topic and brought upon many different opinions (obviously each individuals risk tolerance gave many different views)

    5 Million cash to inv in property. You can only spend it on property/RE.

    What do you do?

    Buy all your properties outright in cash, and sit on the yield…..gear it heavily positive? Less stress? Good income. Pay Tax...... No Loans!

    Buy a bigger portfolio with the help of the banks at say a 50% LVR and be geared in the positive an acceptable amount? A safer level of stress? More bang for buck?

    Go super aggressive with the help of the banks to say 60-75% LVR and be close to zero as possible?

    STRESS! Swing for the fences.....

    What would you do?
     
  2. euro73

    euro73 Well-Known Member Business Member

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    Firstly - whatever else you do, purchase your PPOR outright, so that whatever else happens, you have a roof over your head for life.

    Beyond that, invest for a combination of growth and income.

    Your taxable income and borrowing capacity would play a major role in determining what you were able to do.

    Lets say you spent $2 Million on your PPOR ( Sydney ) or $1 Million elsewhere, you'd have $3 Million ( Sydney) or $4 million ( elsewhere) to invest, and lets assume you are a couple with a combined 200K taxable household income.

    Borrowing capacity permitting, at an LVR of 55% you could invest in a 6-8 Million portfolio, which should yield neutral or possibly even slightly positive pre tax cash flow, and perhaps a little bit more coming back from the tax man for depreciation... That could be made up of 10 x 600-800K properties in more blue chip areas, or 20 x 300-400K properties in less blue chip areas, or a combination of both. You'd be borrowing @ 3-4 million in either case, and funding the deposits (45%) + stamp duty and costs (5%) yourself with 3 or 4 million in cash. That portfolio could simply sit and mature, and in 15 + years you'd likely be sitting on a very very very good wicket IF you get strong growth. That should allow you to sell of just a handful of the properties, clear all the debt and live on a passive income for life.

    If NRAS was still readily available, I'd make more certain of the outcome and take advantage of the additional cash flow to gear to a higher LVR, say 80%. This would allow me to use much less of the 3-4 million in cash, but generate superior cash flow and improve my taxable income position, simultaneously. 10 or 12 x 400K properties would each generate @ 15K of deductible losses (150K -180K in total - more than enough to reduce the 200K household income to below the tax free threshold ) , and @ 10K CF+ tax free each , adding an additional 100-120K of untaxed income to the 200K tax free household. Thats 300K tax free, with a $4 million portfolio, an unencumbered PPOR and sveral million in the bank, as my contribution would only be 25% per property for deposit, stamps and costs. ie @ 100K per property. So I'd only use @ 1-1.2 Million of the $4 million. The combined @ $3 million of tax free cash flow over 10 years, plus the several million I had not spent, could easily pay off the debt at the end of 10 years, and I'd be left with large portfolio generating a large passive income, without ever having to sell anything.

    Or, you could simply ask yourself... with $5million , why do any of that? Why not just invest in something generating 5% franked returns and enjoy the 250K income for life?
     
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  3. TheGreenLeaf

    TheGreenLeaf Well-Known Member

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    What is the goal and what is the timeframe to achieve it?
    I would say investing without a clear objective will not bring you anywhere.
     
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  4. Sackie

    Sackie Well-Known Member Premium Member

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    Buy as many value adding real estate deals as I could around Australia, leaving enough money left over to fund all the projects and some for contingency.

    But I wouldnt talk too much about property in your assignment, they might fail you..considering its a FP course.
     
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  5. Scott No Mates

    Scott No Mates Well-Known Member

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    No.3 in the 5th at Randwick - 10 to1
     
  6. THX

    THX Well-Known Member

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    I think with 5 million I would buy Mt Druitt :).
     
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  7. Jebi6a

    Jebi6a Member

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    It was directed @ each individuals current situation. So in YOUR current situation today, what would you do.
    I had suggested weekend in Vegas and end with it all on Red!
     
    Esh likes this.
  8. Big Will

    Big Will Well-Known Member

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    Provided serviceability it would be

    Take 4-4.5M leverage it out at 80% = 20-22.5M, then go buy 25-30 properties at 600-700k in Melbourne and Brisbane. Using the 1M for buying costs and to service the loans until they become all neutral/positive.

    Assets would be land rich and targeted for growth (e.g. 7-8% growth with about 4% yield).

    Keep working during this 10 years and if I got the numbers right I would have 20M-22.5M in 10 years and I can either scale back work or quit depending on what I wanted to do.
     
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  9. peastman

    peastman Well-Known Member

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    $5M at my stage in life would give me a very comfortable income for life, so I would very much uncomplicate my investments to be very passive, maybe just in a term deposit. Live happily ever after, maybe on a beach somewhere. Tahiti sounds nice, James, Tahiti.
     
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  10. Player

    Player Well-Known Member

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    It's Simon :D

     
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  11. joel

    joel Well-Known Member

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    I'd rent a million dollar mansion in Adelaide for about 30k a year and never buy a PPOR. For the capital I'd go a nice mix of ETFs, term deposits, individual stocks (goldies are doing well) and cash flow positive properties.
     
  12. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    You have to know what the purpose is in investing for this hyperthetical person and what there attitude is to risk.

    If it was me i would probably pay cash for a main residence and then borrow against it and then buy several lower end properties spread out across australia under different entities. Ideally using 100% finance but this may not be possible for this example so i would keep a sum of cash in the offset of each property so there is no negative gearing yet can maintain 100% borrowings which will help living off rents as they grow.
     
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  13. Bran

    Bran Well-Known Member

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    I'd do this too.

    It's a bit depressing that 5 million in cash wouldn't allow me to retire. Argh!
     
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  14. D.T.

    D.T. Specialist Property Manager Business Member

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    Use it as a 10% deposit on 50mil worth of houses in Adelaide and then control the rent market :p
     
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  15. datto

    datto Well-Known Member

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    Buy a McDonalds franchise.
     
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  16. Steven Ryan

    Steven Ryan Well-Known Member

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    I'd use it to finance a development then either call it a day or pull equity and repeat a few times depending on whether I wanted financial freedom or total abundance.
     
    Esh likes this.
  17. chindonly

    chindonly Well-Known Member

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  18. mrdobalina

    mrdobalina Well-Known Member

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  19. Ozzie in Texas

    Ozzie in Texas Well-Known Member

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    If the number one rule of your assignment is NOT to be negatively geared, surely you wouldn't pay cash for your PPOR - instead borrow against your investment portfolio to fund your PPOR and use your $5M to invest in a combination of the above to kept it at zero.
     
  20. albanga

    albanga Well-Known Member

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    Step 1 - Buy PPOR in favorite suburb for 2mil in cash.
    Step 2 - Quit Work (I'll keep working until I find something nice to live in).
    Step 3 - Purchase 2.5mil in blue chip, almost non existent vacancy suburbs across Australia with cash. Ideally 5 properties at 500k each at $500 per week rent. Allow 20% for costs $2000 per week net. $104,000 gross income per year.
    Step 4 - Stick the remaining 500k in bank for property apocolypse.
    Step 5 - Travel and generally do whatever the heck I want!

    Is this the best use of the money. Very much not! Is this the easiest use of the money that basically means a stress free life. YEP! Sure someone will argue boredom but I'll just offset that with another week away on a tropical island.
    If I really want to live life on the edge I'll chuck my place on AirBNB for the extended months I'm overseas.
     
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