My investment journey, but what should I do next?

I see you have already offset the wife's loans and your main residence is fully offset. I would consider changing the loans to PI but only the ones not offset. Using IO loans can speed up retirement but so can paying less interest and paying down loans.

 

If you were crossed and we needed to restructure, CBA would not honour your current discount as it's way more generous than what's currently on offer.

But happily, that's not an issue for you!

If you were to fix, it would revert to your current discount so that's good.

 

At this stage you're with CBA - who currently don't have reassessment for IO extensions. But given the current market, this is something that could change.

This is what I would be doing, well exactly what I'm doing for my own portfolio. Fixing all the Investment loans at lower rates with IO now.

Using all excess funds to paydown PPOR which is currently IO, original plan was keep IO so could payoff lump sums and split, don't like paying the extra interest for the IO. But likely going to need to as it matches my goals and the flexibility to have access to the funds outweighs the costs of the extra IO premium.

 

Boseprop you are halfway to your goal in terms of income. Have you worked out how much more you need to reduce the loans by to get the extra income needed?

 

I dont think the interest on the loan to DT would be deductible, in which case it would not be a good outcome. Plus the banks will not lend me any more money (unless I split my PPOR loan and pay off / redraw).

 

Yes.. payoff say $500K and re-draw for investment purposes.
Loan to the DT at the same home loan rate. Say 4%.
Invest in stocks give more than 4% and divert the income to your wife.

 

Good question - I did not know the answer to this until I put this post together. At current interest rates I would need to reduce loans by $1.1m. This will take me 10-15 years. Even longer if rates go up.

I did a calc to see what would happen if I sold the underperforming Hornsby property now, and to my surprise this would boost me up to ~70% of my income goal.

So....would a good, sound strategy be to keep the portfolio going as is, and then exit the underperforming Hornsby property in say 5-10 years - hopefully get a bit more growth out of it? I dont see how else I can reduce my loans any quicker.

 

Yes the interest would be deductible.

 

Yes that could be worth considering.

Did u factor in rental increases too? Increases in wages. Compounding etc.

But rates may also increase.

 

I would have the home at a lender you have no other business with.

 

boseprop an inspiring story. My partner and I are going through planning our cash machine for the future. Keen to know your ownership structure, all in personal names and not in trusts?

 

Nicely done with close to $4mil in equity on a single income and having a young kid! Be good to hear your journey.

 

So here's what I'd do.

You mention you're considering cashing out of Sydney. Honestly, I don't think that's unwise, however Sydney isn't necessarily one market. If there's a correction, apartments and new developments are the most likely to see large falls. Look at your property type. Do you have quality detached (separate) houses in middle-income, competitive areas? If so, keeping some of these might be a goo idea.

If you're holding an apartment or unit, look at your current competition - browse current listings. If these far outweigh recent sales, I'd question your potential future growth.

In Ireland good quality houses in middle-income suburbs (not fringe developments) were king. These attracted most of the demand through the recession, both as purchases and rentals, and have seen a rapid recovery. Markets like new estates and apartments often still haven't recovered and may never do so, as the bulk of the crash was concentrated in them.

Why is this? Well, if you are in a development-heavy suburb you will be competing with developer discounting - this can quickly send markets into a downward spiral. If you have say an apartment or house and land package, developers own many of these assets, and usually have more scope to slash prices if buyers dry up. Oversupply is also a huge issue - you can't easily compete with the builder next door if you both have apartments on offer, in a market with thousands of identical offerings, because you probably won't be willing to knock off 30-40% (like this developer Sizzling hot deals: Brisbane apartments offered at 39pc discount in 'fire sale') or hand out free cars (like this one Chinese developer gives away $70k electric BMWs to entice buyers) or the like.

For similar reasons, owner-occupier dominated suburbs are safe harbours, especially if they're on middle incomes. These owners are unlikely to lose their jobs (one of the reasons to avoid cheaper fringe suburbs), often have much more equity, and will hold on for dear life. If you take a dive in value, you will probably attract good rents, and if you've chosen wisely may be able to use the time to value-add.

So if you own in Sydney right now and have such as asset, weigh those factors up. If you're holding an apartment, and there are already a lot of other similar apartments in the surrounding suburbs, I would strongly consider the possibility that Sydney is at or near its peak. With rising rates, flat incomes, tightening lending - price growth is being led mostly by investment, but it's easy to argue sentiment is starting to turn.

Another option is cashing out. This would free capital to re-invest in other less bubbly cities (where fundamentals like incomes, and prices, aren't so dangerously separated). Markets like Perth, Brisbane, Adelaide - these aren't nearly as overpriced. Perth has some real potential because it's just been through a sharp correction. Suppose the bubble does burst and a correction spreads, well - even if Perth's correction continued, it's better to fall from halfway down a cliff than it is to fall from the top. Personally I would be selling apartments and looking to diversify both into shares and into other cities. Buy quality detached houses in good areas (one helpful way to pick up and coming areas is Naplan scores - highly rated suburbs tend to be extremely popular with families, making those suburbs competitive, and high Naplan scores correlate to higher and more secure income bands).

I would keep the equity in my PPOR, examine my portfolio for potential dead weight, I'd consider diversifying. Look for quality over quantity.

 

A lot of the things you have said resonate with me, particularly quality over quantity.

Diversification outside of property is something i have not considered too much, especially into shares. And given my past experience I am still not that keen to be honest.

Diversification into interstate property is an interesting one for me which I had not considered too, but it makes sense and is something I will look into.

 

No rental increase taken into account. I like to be conservative in my calcs so I know the worst case scenario - any upside from there is a bonus

 

Firstly... You and your wife have done very well! Well done with having the funds sitting in offset and no loan repayments to really worry about on the PPOR. My recommendations:
1. Go to the next Peter Thornhill day in Sydney (look at the Sydney Uni Centre for Continuing Education website). I was anti-shares too till I went to his day.
2. Yes, consider buying interstate.
3. Consider selling Hornsby, but if you think there's still a few years growth in it, I'd still keep it.
4. You probably do still have borrowing capacity, but perhaps not with CBA. Talk to a broker (eg. Jess who replied above)
5. And yes, for lifestyle... based on what has been written I'd want to cut down on work hours, enjoy some time with your family and get a better work-life balance. Imo it should help you not burn out and have a better career.

 

Boseprop,

You have done very well for your age however i do see that yours is a very concentrated portfolio of Sydney properties. Iam sure Land tax must be hurting your net income...Interstate and Shares(selective base don market valuation. Can be through Super) will definitely be on my radar if it were me.

Few things which can have an impact on your next steps and passive income:

1- Does wife intend to work in near future? This can have big impact on your ability to pay down the loans.
2- Super - You mentioned SMSF. Do you or your wife hold any other super? This will assist in providing income after 60yrs and also retiring early by enabling you to use other assets before 60 yrs of age more aggressively.
3- Kids - Any more kids in plan or Private education? Big expenses these esp in Syd/Melb top private schools.

Food for thought...