Passive Income From Real Estate.

Yet on PC the benchmark income is $100k pa, very difficult to achieve with resi, why diversifying, CIP, shares, trading, developing will help. I guess why most move on

 

As a simple B+H investor, my investing principles are likewise simple (some people make this more complex than it has to be). Three of my investing principles are:

1. Give compounding as much time as possible for it to work its magic (in other words, start investing as early/young as possible).
2. Accumulate high capital growth assets as quickly as possible to assist Principle #1 above (in other words, use OPM to accelerate the accumulation). This will/could result in the purchase being negatively geared for some time (that's fine).
3. Increase one's non-asset income as quickly as possible to assist Principle #2 above (through job promotion, second job, running a business, ...).

I have set up a simple financial model to demonstrate the power of these three principles working together. Firstly, some assumptions:

• Inflation rate of 3%
• Starting non-asset income of $100,000 which increases each year at the rate of inflation
• Contribution to investment 10% of each year's gross non-asset income (like Super)
• Buy high capital growth assets which generate total return of 13% pa (similar to ASX over last 108+ years). Total return is re-invested.
• Borrows $500,000 I/O at end of first 5 years to buy high capital growth assets to accelerate the result. Pay for interest out of non-asset income. Repeat 3 more times - call these Loan 1, 2, 3 and 4.

After an investment journey of 20 years, the investment asset value (in today's dollars) is:

• With no loans, value is $698,000
• With 1 x loan, value is $2.65M
• With 2 x loans, value is $3.72M
  
• With 3 x loans, value is $4.29M
  
• With 4 x loans, value is $4.60M

After an investment journey of 30 years, the investment asset value (in today's dollars) is:

• With no loans, value is $1.94M
• With 1 x loan, value is $6.88M
• With 2 x loans, value is $9.57M
  
• With 3 x loans, value is $11.02M
  
• With 4 x loans, value is $11.81M

I could make the model a whole lot more complex (for example, including tax paid, refunds from negative gearing, etc) but hopefully, the above demonstrate the power of these three principles.

PS
@MWI, I will comment on the other points in your post tomorrow (hopefully)

 

If I plug $80,000 into my simple financial model from above post and using no debt, it calculates 30 years to get to $1.5M (in today's dollars) unencumbered.

By taking on one loan and paying it back at the end, it calculates 18 years. Two loans, 16 years.

If I plug $80,000 into my simple financial model from above post and using no debt, it calculates 37 years to get to $3.0M (in today's dollars) unencumbered.

By taking on one loan and paying it back at the end, it calculates 24 years. Two loans, 21 years.

In my model, I kept away from the property vs share argument .

As I have stated many times on PC, I believe that is a silly argument and one should invest in all three asset classes - property, shares and cash.

The split between these three will changes as one journeys through life/along the investment road and it also depends on whether one is comparing asset value or net worth (don't forget I am a big believer in good debt and one should resist about paying it back as long as possible).

Right now, our split based on asset values is 60% property, 33% shares, 7% shares. Debt used to buy IPs.

But based on net worth, the split is 45% property, 45% shares, 10% shares.

You need to create your own financial model to do this as there are millions of different combinations.

As a B+H investor, my preference is not to sell property as it destroys net worth. Also, if one understands compounding, the gain gets bigger and bigger each year the longer one holds the high capital growth asset.

I don't know your personal situation but my first preference is to use equity/debt to accumulate high capital growth assets.

I know I am a dumb old fart but I don't understand why one wouldn't borrow at say 3% when one can generate 13% with those funds?

I have been retired for 10 years and I have borrowed more in retirement than I did in accumulation.

I believe by now I have answer that question.

 

Kierank your contribution % is too low! And that's an optimistic forward looking total annual return. How do the numbers look with 40% contribution and 9% pa?

 

Wonderful illustration of the power of compound growth and what happens when you allow enough time to work it's magic.

I have a similar simple strategy to get to the final destination. For me the variation is focussing on increasing non asset income to speed up the investment journey.

 

I agree but I didn't want to use x% and have people complain that x was too high/unrealistic.

I actually selected x as 10% (knowing that it was too low for serious investors) because it is basically the same as SGC which everyone can relate too.

I would have to disagree. The ASX has achieved (an average of)13% pa total return over the last 108+ years. This period includes WW1, the Great Depression, WW2, GFC, ...

Even my own share portfolio has achieved 14.5% pa over the last 18 years (22/10/2002 to 20/10/2020). This period includes GFC, COVID, ...

When I perform scenario planning, I use the inflation rate+5% for growth and 4% to 5% for gross income. Hence, with a long-term inflation rate of 3%, the total return would be 12% to 13%.

I do feel that 40% contribution is too high and total return is too low as it is saying to me that the long-term inflation rate will be 0% at best.

Having stated that, here are the numbers (using $80,000 as the starting non-asset income):

After an investment journey of 20 years, the investment asset value (in today's dollars) is:

• With no loans, value is $1.37M
• With 1 x loan, value is $2.47M
• With 2 x loans, value is $3.18M
  
• With 3 x loans, value is $3.65M
  
• With 4 x loans, value is $3.95M

After an investment journey of 30 years, the investment asset value (in today's dollars) is:

• With no loans, value is $2.87M
• With 1 x loan, value is $4.80M
• With 2 x loans, value is $6.06M
  
• With 3 x loans, value is $6.88M
  
• With 4 x loans, value is $7.41M

I will you interpret the numbers.

 

You know I agree with this. But assuming you can't refi or cashout the equity going forward, are there any plans down the track to sell and enjoy the benefits...or will that be gifted to your kids?

 

This requires equity AND borrowing capacity ... it was difficult for all but the very few to achieve pre APRA. What sensible argument can be prosecuted to make the case that it will be possible for a growing number of people to achieve post APRA and post COVID? Probability of it being more widely successful in this environment is very low. Never say never, but it's not likely

To be fair, all we have seen so far is a proposal from the treasurer. It has amounted to zero detail so far. It hasnt been legislated and while the media has suggested it will lead to additional borrowing capacity for one and all I fail to see their argument for the most part. If what he has suggested is actually legislated , it will only remove the requirement to apply additional scrutiny to living expenses, over and above HEM. Now, it can certainly be argued that for those who live well beyond HEM it will provide an advantage, as they can say they spend HEM and not have it questioned. But it wont help those who spend HEM or less than HEM.... and it can also be argued that HEM may continue to be increased each quarter, as it has been since implementation.... in fact, several lenders have increased HEM just this week..... and that will cancel out ( or largely cancel out ) any advantage that a change such as this might have generated for a small percentage of borrowers. Right now, this whole thing is just a thought bubble. Nothing more, nothing less.

I get that everyone is looking for any small thing to grab hold of to make a case for a credit boom. Its hard to withdraw from the never ending sugar hit that the expansionary credit diet today's property generation have been raised on. Same hyperbolic excitement has been happening with the tax cuts. But as I demonstrated on that particular thread, the improvements to borrowing capacity from those changes are tiny at best. So tiny they will barely move the needle for most borrowers. Really, only owner occupier clean skins carrying no other liabilities and earning 120K + will see anything approaching an improvement...if you can call 30ish K an improvement. For everyone else the changes are less than tiny.

If you want real change, you need SPARTA.

Sensitised
Principle
And Interest
Remaining
Term
Abandoned

Until that happens, people trying to implement a LOE strategy will need to pass servicing calcs that still use those 5 nasty words- Principle And Interest Remaining Term.

And of course, the elephant in the room. Everyone seems to be pretending COVID doesn't exist, that Europe isnt going back into extreme lock downs right as we speak ( just the UK alone is now seeing 20,000 new cases per day and Ireland has initiated a complete lockdown today . Belgium ,Czech Republic. Germany. Austria. Spain. parts of Northern Italy... all reintroducing restrictions again ) and that the removal of all safety nets here by March 31,2021 will be nothing more than an inconvenience and that credit expansion will still happily soldier on and drive growth and create LOE comebacks and such...... Again, never say never , but all extremely unlikely without SPARTA.

I hope I'm wrong, but I think people are being delusional about some of these possibilities. For old models to be relevant again, old lending rules need to come back. That would require APRA abandoning any sense of protecting the banking system from itself. And even if they do all of that , when the real effects of COVID arrive next year it may make such things redundant

 

Just looking at the above post signature

Aim to get 4 x dual occs in Goulburn and 64k per year sorted (I also believe their would be a lot advantages from a tax perspective so that 64k a year is more than your current PAYG 64K)

Are you actually looking at living of 64k per year or is this an amount you want as a base to go try whatever you want in life? Including making more money the way you want too?

 

Okay, well I hope you are right.

You are making sense in an insane financial world where free market discipline was lost decades ago.

We live in a world where, as Rick Rule jokes, "recessions are illegal".

The reason the irrational is going to happen is because governments need asset prices to go up to give their crazy Ponzi-based debt fueled economies going.

Yields don't matter, debt will be infinite, and you want to be in tangible stuff to ride this out.

But we will have to wait to find out.

 

Thank you @kierank for such detailed plan but you are right we must plug in our own numbers.
I suppose why I left your comment above is that those world events don't explain why ASX or property in Australia is so expensive, at prices they are currently... still high regardless...of current unprecedented circumstances?
I don't have a crystal ball into the future as some economist or other people do, but I would classify wars, great depressions into similar category as Covid-19 if not worse as a lot of people died and struggled afterwards, way of life was so much harder than.
These evets happened, keep happening and no doubt will happen, circumstances or future events that will occur out of our control.
So all I can do is modify, change and adopt but continue to INVEST, continue to soldier on..... Some may call it gambling or lotteries but just substitute in below passage words 'games of chance' with 'investing' when Tomas Jefferson wrote back in 1826 in "Thoughts on Lotteries":
"If we consider games of chance immoral, then every pursuit of human industry is immoral; for there is not a single one that is not subject to chance, not one wherein you do not risk a loss for the chance of some gain".
As Maria Konnikova said, "That's our challenge in life, an exploration of chance and skill in life - and attempt to learn to navigate it and optimize it to best of our potential", no matter what parameters will be thrown at us, will change (e.g. credit rules seem a minor in comparison - the qualitative side of things versus the measurable - as humans we are irrational and emotional decision makers.).
Hence why I still believe in passive income RE, it may be called under different names but to me it still represents investment.

 

We are retired - so no longer in accumulation phase. We are unlikely to refi or cashout.

When we entered pension phase 10 years ago, I promised the wife that we wouldn't buy any more IPs. Since then, I couldn't help myself and bought some serious property, all 100% borrowed.

I think if I bought another, it would be DIVORCE. That isn't part of my wealth creation journey .

Due to a number of events such as low interest rates, our property portfolio will be cashflow positive earlier than we anticipated. It is slightly negative at the moment but will be significantly cashflow positive next year.

We use our mandatory SMSF pension to fund our lifestyle. We will be getting a 25% pay rise next year when our mandatory age percentage goes from 4% to 5% .

So, in the short-term, we will just place the excess cashflow in offsets until they are chockers. At some point, we will transfer the cash from offset to pay out some/most of our loans.

Probably we will do this at some point.

As most of the IPs are owned via trusts (which vest in 2083 or later, there is no rush), we just need to appoint our kids as directors of our trustee companies. No CGT .

 

You do know you could setup trusts with no vesting date, and I thought if a trust terminates by vesting date then CGT applies?

 

Every time I hear the above comment, I am reminded of my grandfather.

One day he said to me that he felt sorry for my generation as property prices were ridiculously high (his words).

That day was 47 years ago when I was 17.

Nothing changed - I had no idea back then and I have none today.

I just know that over the last 45+ years, I have educated myself, I have worked hard, I have taken risks, I have had failures, ... but I haven't sat on my ass.

End result is that today I am one happy, dumb old fart because of the journey I took.

 

Brilliant!

 

i don't believe that was the case back in 2003. I will leave it up to my kids to sort that out (and pay for it ).

Sorry for the confusion. When we change directors, there is no CGT.

When/if the trusts vest, then yes there is. But that is my kids problem to sort out.

 

Sure... but it will require SPARTA. It cannot happen without it. The borrowing capacity just isnt there while we have those 5 dirty words in play.... it's really actually two words that matter more than others; "remaining term" .....

 

I'm changing my avatar to SPARTAcus

 

Am I the only one, when I saw SPARTA...…..

Thought of the movie and recalled the famous line...….This is SPARTAAAAAAA!!!!!!

Off topic.