Plan to retire (At least partially)

Hi guys,

Have been reading some stories on here of people who have managed to retire quite early and am looking to see if someone is able to point me in the right direction as to how my property investment journey can get me there a little quicker. Current situation is as follows:

• Partner and myself are 26 years old, currently living with parents but moving out soon
  
• One OO property being built, MV around $800k once done, debt will be approx $610k, IO loan
  
• One IP, MV around $1.2M, currently rented for $880 p/w and will jump up to $895 next year, debt is $1.052M, IO loan
  
• $150k in cash in offset for OO property
• Joint gross income of around $150k p/a

Future plan/goals include:

• Move into $1.2M property as our OO, change current OO to IP. Have put the partner down as the title holder and will pay her out and have transfer proceeds go to reduce the $1.2 Mil debt. Probably happening in about 4 years.
• Ideally have $1.2M OO property paid off completely.
• Try and have $75k in after tax rental income in 10 years time. Would prefer to LOR rather than LOE.

Not sure if the 10 year time frame is realistic, I don't need to be pulling a 6 figure cashflow positive rent as we are more than happy with $75k as our figure given that could potentially allow us to work part time, take on a less stressful job or at least have one of us take time off work while the other works full time.

Will be interested to see what could be done here. Have been looking at euro73 posts around the whole NRAS thing which i did like however with the recent changes i think my ship has sailed. Only issue I have now is i might be just about to hit the serviceability wall and am thinking about buying another IP before we move out of home so as to make the process a little easier.

Happy to hear what anyone thinks!

 

First of all, awesome work getting in yourself in such a good position at such a young age!

While posting on PC is great, don't discount the possibility of getting personalised financial advice from a financial planner. On PC (as the name suggest) you are only going to get advice about property, but a planner can look at other assets classes for you.

So let's break it down a bit

• Your current investment property has a gross rental yield of 3.8%
• $75k after tax is roughly $50k each before tax, leaving 20% for expenses that's $125k in gross rent per year (together)
• At 3.8% gross rental yield, you'll need just under $3.3m of debt free property to make that return. Plus you probably want a house to live in.
• With $2m in property growing at 4%p.a for the next 10 years will get you $1.2m (but if you sell the CGT will hurt!). $2m + $1.2m gets you very close to the $3.3m mark, assuming you can pay down $1.65m debt in the next 10 years!

I can see your issue with expanding the portfolio, as you have pointed out, will be servicing, are you in careers when you can expect a large increase in income over the next few years? Also you can look at using a second lender to max out your borrowing capacity.

As the years go on you may want to look to switching to lower capital growth, higher rental return properties such as units and apartments, this could significantly decrease the amount of property you need to hold to meet your lifestyle goals.

PS a $880 to $895 rental increase is only an additional 1.7%, that's not enough to even keep up with inflation, the median rental increase in Melbourne last year was 3.3%

 

You asked what can get you there quicker. Simple answer: keep renting and grow your portfolio.

• Your OO debt is going to cripple your ability to grow a portfolio unless your household income sees a substantial jump

Give due consideration to how important your financial goals are vs how important the emotional goal of being able to say "we don't rent" is.

 

• With $2m in property growing at 4%p.a for the next 10 years will get you $1.2m (but if you sell the CGT will hurt!). $2m + $1.2m gets you very close to the $3.3m mark, assuming you can pay down $1.65m debt in the next 10 years!

Of course this provides you with $75k/year after tax in ten years time!

$75k in 10 years time won't be worth what it is now.

 

"Your OO debt is going to cripple your ability to grow a portfolio unless your household income sees a substantial jump"

I'm afraid it's almost impossible to have a huge non deductible mortgage AND build a property portfolio big enough to either manufacture the necessary profits upon sale for an early retirement , or the necessary cash flow (if you dont sell ) for an early retirement , unless you are earning very very large incomes and can pay off debt as you go. Otherwise, borrowing capacity ceilings just cripple you, as Steven has made clear.

This is a classic example of why higher yielding properties and their capacity to aid debt reduction just have to form a part of any strategy moving forward - especially for investors starting their accumulation. It makes clear just why the successful approaches for previous generations of investors simply wont work in the post APRA environment for the new generation of investors . ie - buy, hold, harvest...buy , hold, harvest.... that generation had a lending environment which accommodated that. You , and others starting out , do not. And unless the regulators have a change of heart, you will not in the future, either.


Here you are, with 150K combined income... it appears you are very disciplined savers, dont lead an excessive lifestyle as you've been able to save 150K... and these are all great things... but on a lender calculator you still have 1.662Million in debt and $880 rental income... (895 next year) which is going to be a significant drag on your borrowing capacity.

You have a great platform to build from... but you need borrowing capacity to do so. Your low yield/high debt mixture means you wont be able to accumulate many more properties ...maybe 1 or 2 , but not the 5,6 or 7 cash cows which would typically be necessary to achieve what you are saying you want to achieve. So you've snookered yourself to a degree, and you are now in need of some pretty strong growth on one or both of these properties , so you can sell one of them off and hopefully realise enough post CGT profit to clear the debt on both AND leave you with sufficient lump sum to invest in assets that will allow you to exit the workforce- whether that be property, ETF's or whatever else.....

But you can take steps to address/rebalance things and get back on track...... by staying living at home for a few more years and focusing on debt reduction, you can very likely make some real inroads into the debt , and by using whatever remains of your borrowing capacity to purchase an additional property or properties that can further aid that debt reduction ( that might be a dual occ, or an NRAS, or a buy and renovate for profit ) you can probably just about get yourself back on track to where you wish to be in the next few years....


By the way - you havent missed the NRAS ship yet ... but passengers are being hurried along and the ship will be sailing shortly.... but there are still seats available

 

Respectfully disagree.

You are both 26 and earning good incomes.

High time you stood on your own two feet and move out of home.

Expecting your parents to continue to support you should not be part of your financial plan.
Marg

 

Well sure Marg, but the question goes specifically to retiring early, rather than whether they should be living at home at 26 or not

The fact is, carrying big debt with low yield and worsening their borrowing capacity by moving out, wont get them to an early retirement unless they are lucky enough to get huge growth and have the ability to harvest it.... and back we come to borrowing capacity.

The more dramatic approach of course, if you do wish to move out to your new build, and still build a portfolio, would be to sell the expensive low yielding INV property and start over with some less expensive , higher yielding stuff... or you could focus on significantly increasing both of your incomes - if thats something thats realistic.

However you decide to go about it - this is a real world example of why growth alone will not get you where you want to be in this post regulated credit environment- particularly and espacially if you are just starting out. The members here who often advise to focus on growth or renovation or development often dont tell you they had significant seed money to start with, or significant other assistance, or are on much higher incomes than you, or have much more mature portfolios than you generating yields that arent as affected by APRA, and what they almost never concede is the fact they were able to achieve things in an expansionary, accommodating credit environment when lender servicing calcs were facilitating portfolio expansion , rather than curtailing it. In other words - credit played a huge role in their success even though many dont acknowledge it . But as a new starter, you are going to have to acknowledge the fact credit will define what you can achieve.

Dont care who you are - today you can borrow less than you could a year ago. Next year you'll be able to borrow less than you could a year ago.... and the year after that. And so it goes.

So Investors starting out today should not be trying to specifically emulate previous generations approaches unless those approaches also assist with borrowing capacity. The outcomes are unlikely to be reproduced. Today's new starters should instead be factoring in debt management/debt reduction/cash flow as a key component to whatever approach they take.

 

Agreed, although the income isn't THAT great @ $150k combined. I'd be trying to live off of the one income, and saving the rest. You never know when a small family addition will come along, and the ability to budget will be something that is invaluable.

Yep!

No matter which way you look at it, if your aim is to live off rent (which we do, BTW) you won't get there with expensive low yielding properties. Like others have said, your serviceability will be shot in no time at all.

IF you want to keep both properties, I would suggest that when you move out of your parents place, you move to cheap rental accommodation. If it's just the two of you, there is no reason you can't rent a small unit, in a not too swanky area. This will cost you a lot less than the rent you will be missing out on, by moving your tenants out. It will also keep all property expenses tax-deductible.

For future investments, I'd also be taking a good long look at the yield, if they are going to be a long term buy & hold. Although a lot of people don't like it, the best areas for a higher yielding property tend to be lower socio areas, not nice new $1m plus homes. OR something that has a twist. Two dwellings, one block of land, or a home that's marketed as 3 bed, but the floor plan is such that you an add a wall & make it a four bedder (increase of rent) again this works best in a lower socio area, where they don't expect two living areas and/or extra bathrooms. You may have to look further afield than your immediate area to find something as well.

If looking for a quick flip, remember Australia isn't like the US shows. We have Stamp Duty, and CGT, to consider, so you need to factor this into the equation.

 

Another option would be to retire at age 46 instead of 36. I think you would be in a great position to do this and 46 is still young enough to do everything you want in life.

 

I wont beat around the bush - I think there's still quite a disconnect between what some here THINK is required and what IS required, to retire on a 6 figure income from rent. And for the OP, unfortunately unless you take a total U Turn to your approach - what is suggested above ( retire at 46) is unrealistic, and whats much more likely is that you'll be working until your late 50's /early 60's.

It's a very simple concept. Work backwards from the result you want. If you want to earn 100K NET income ( which is modest for a couple, and even more modest for a couple who havent started a family yet) , you need at least 3 Million + in unencumbered, 6% + yielding property.

if you want to earn 150K NET income - which is probably more along the lines of what will be required after you add children to the equation.... You need 4.5-5 million of unencumbered, 6% + yielding property.

A $3 million value portfolio would see you generating 180K income per annum BEFORE costs, based on 6% yields. And that's assuming 100% occupancy, 100% of the time. But the costs for property management, utilities, repairs and maintenance, landlord insurances, strata levies or building insurances, etc need to be accounted for , and then taxes need to be accounted for.... You'll be scraping to @ 100K income.

In order to own 3 million + in unencumbered property generating an average yield of 6% , you need to be able to accumulate a much larger sized portfolio than you have - and equity wont do it for you...only borrowing power combined with equity, will.

As for the 2nd option...4.5 million and 150K income.... add 50% difficulty to the last paragraph....


I just dont get how so many posters on here - and particularly the younger ones starting out - are still failing to see what is right in front of them. # NEW. CREDIT. ENVIRONMENT.

Chasing growth - which will not come in the same volumes or at the same speed as it has previously - with no consideration for cash flow , is a fools errand for those starting out. Magic for the previous generation. They got a great outcome.... but even experienced investors , and most definitely experienced skilled brokers will tell you - that era is over.

The capital growth bug will deceive you initially because you'll see NET WORTH from equity...until you realise net worth doesnt pay the bills, nor does it allow you to borrow more, which in turn means you will eventually not be able to move onto your next deal without selling - and thereby scuttling plans to live off rental incomes. So you'll have to stay in the workforce. Sure, you'll have bragging rights over your net worth, but you'll still be at work !

Gotta get some cash cows in the mix. Balance Balance Balance....

 

Euro, what do you think about getting some high growth properties and periodically selling, paying off debt and buying again?

High transaction costs, but the extra gains can be better than getting a few hundred more per property per year in rents.

 

That's potentially very effective Terry - but it requires a lot of active investing... sales, purchases, sales, purchases... and a good dose of luck. And the necessary income to hold the low yielding assets while you wait for the pot of CG gold at the end of the rainbow.... and you're typically looking at 7 or 8% transaction costs each time. Selling costs + stamps and legals....

Now, given the right circumstances...making all the right choices, at the right times, ...sure.... could be wonderful.

All I'm suggesting is ...all I have ever suggested is.... get 1 or 2 cash cows into a portfolio. Then, whether markets are up, down,sideways, flat, frothy..... you have debt reduction in play as a contingency for all seasons.

And especially for younger/newer investors.... think long and hard about whether you want to constantly be trading in/trading up... trying to constantly make the right call at the right time... in order to successfully achieve the buy/sell/buy/sell/buy sell outcome outlined above.. or whether 1 or 2 cash cows early in a portfolio will provide you with a safer platform from where you can attempt that...

I think those with a sounder cash base can add greater variety to the way they approach their portfolio development as it grows, in a safer way.

FYI I also think we should all be very careful to assume growth in future years will be the same as what it has been in past years.... so the traditional premise of "high growth properties" may need some reconsideration ... I prefer to think of them as " high credit growth enabled properties" as it better describes what they really are....

 

OP why do you need such an expensive PPOR at you/our (you're slightly older than me) age? have you considered how much capital you're tying up & how much more diversified you could be by going with 400-600k props rather than $1m-ish props?

On an unrelated note?

Why does the new credit environment matter so much? I've had no issues buying 2 properties so far on a sub $100k income solo and my broker is very confident I can get a 3rd tomorrow if I wanted. That would put me at roughly $1.4 - 1.5m worth of property age 25 with 80%-ish lvr. That means I've still got 20-ish years ahead of me before my target retirement date to expand my serviceability by:

• Partnering (becoming a double income household. Already am but invest solo as is)
• Growing my PAYG wage
• Growing my income via other investments & rental growth

I mean lets say I do buy that 3rd property tomorrow. based on my current savings rate if/when I walk into a bank in 5 years with $200k+ in savings, hopefully a higher wage (even if just via inflation) & hopefully half a decade of rental income & capital growth.. Methinks I'm not going to have any issues with serviceability to buy another property or two.. Rinse and repeat another 5 years after that.

So yeah, maybe the days of 10 properties in 5 years on an average income is over, but it still seems to me like building a big resi prop portfolio is quite doable with a "slow and steady" approach.

 

I think with the new credit environment its far more important to become an active investor, by this I mean trading property and upskilling/strategizing, reducing debt, servicing debt and moving into strong markets.

Buy and hold strategy already is a slow process, it wont get any easier and many investors are not interested in market conditions. The main focus is just accumulating property and success is how many properties they hold, not the value or the performance.

All to their own.

MTR

 

I'm certainly not the best one to ask...but my thoughts are its going to be very difficult to do so. Reasons others have noted- you are looking at 12 years till retirement; you combined salary is probably not high enough given your 600+k debt on one single property (ppor)and IP debt over a mil, your expenses will shoot up once you move out of your parents place and even more so if kids come into the picture...and the list continues.
Sorry to be pessimistic, but its not likely with what you have in the timeframe you wish. Agree with the others, make your retirement to 50+- more realistic and stress free.

 

200K of cash is nice. It might improve your funds to complete. It might lower your LVR. But it won't improve your borrowing power unless you have used it to reduce your existing debt.

Salary increases , rental increases and a partner as a co - borrower ( provided she is working and isnt carrying any debt herself) will improve your borrowing power in the short term

Partner stopping work as you start a family will decrease your borrowing capacity in the short term. and the addition of dependents will decrease your borrowing capacity for up to 18 years.

Loans reverting from I/O to P&I at some point down the track will decrease your borrowing capacity.

There are many many variables, but to answer your question about to why credit matters more than it used to; the simple answer is - sensitised assessment rates and HEM's

To explain

When you apply for a loan, we call it "new debt". Mortgage debt you already owe is called "Existing debt" or "OFI debt" ie Other Financial Institution Debt . Pre APRA, new debt was assessed with a sensitised rate, and existing or OFI debt was assessed by many lenders without any sensitised treatment. It was a policy you will often read brokers referring to as "actuals" meaning that the "actual" rate you paid was what the bank calculated you to be paying. Their servicing calculator did not apply any loading whatsoever to this debt, or the repayments you were making on this debt. So $1 Million debt at 4% I/O was calculated to be costing you 40K per year.

That has changed at just about every lender. Now, lenders continue to assess the "new money" at a sensitised rate, but they also assess all existing or OFI debt at sensitised rates. Those sensitised rates tend to be between 7% and 8%. So now, each $1 Million of debt you already carry ( in your case, Loan 1 and 2) will be assessed as costing you 70-80K per annum next time you try to borrow money for a mortgage. So the result is- Pre APRA , $1 Million was assessed as costing you 40K. Post APRA the same $1 Million is assessed as costing you 70-80K. I would have imagined Blind Freddy could connect those dots and see why the credit environment of NOW is a very different place to the credit environment of THEN

Now in your case, that may not prevent your broker getting you another 500K for loan #3, or even another 500K for loan #4, ... so let's say that happened. Let's say you were successful in securing an additional $1 Million in debt to purchase property #3 and property #4; That additional $1 Million in debt , plus the $1 Million you already owe, ( $2 Million in total) would then also be assessed as costing you 140-160K per annum , when you try for Loan #5 , later down the road....

Even if you are only paying 4% I/O on that $2 Million debt, which equates to 80K per annum, bank calculators are going to treat you as though you are spending 140-160K .

So every time you borrow, your DSR/NSR ratio diminishes. And for the purposes of most lender calcs, this means you effectively require a 20K Gross ( 17-18K Net) salary increase after each 500K loan is secured, just to maintain DSR/NSR ratios for the next loan application. Otherwise each purchase equates to an ever shrinking servicing position.

Or, you need to buy properties yielding 9-10% . Banks use 80% of rent in most cases. 80% of 9-10K is 7.2 -8%, sufficient to counterbalance the 7-8% sensitised assessment rate.

Now, I guess some people may be lucky enough to see those sorts of never ending salary increases and can prevent their servicing from ever diminishing - or they will inherit a windfall that allows them to pay off some debt and that will do the trick for them. But for most people , big payrises and 9-10% rental yields are not on the horizon, so one way or another these changes will affect them - mostly sooner rather than later.

Yes, you can attempt to counter that with the addition of co-borrower incomes and with salary increases and with rental increases etc, but they will only provide a temporary boost to capacity. Those sensitised assessment just rates are what they are, and they gobble up 35-40K per $1Million. Simple as that. So even if you add a second income, your forehead will eventually be bumping those ceilings again unless you can keep generating higher and higher income and yields... .

Then, as your loan terms on Loans 1 and 2 mature and require refinancing or restructuring, or as they revert to P&I when you can no longer refinance them to I/O terms because of servicing ceilings, you're repayments will increase enormously, and your servicing capacity will suffer further. Then 3 and 4 will roll into the same situation.....

I wont even get started on the impact of HEM's.... other than to say they take another 10-15K whack of income away from you in many cases, depending on your household configuration. That means that under some circumstances, when you add the impact of HEM's to the impact of sensitised assessment rates, you can be looking at up to 55K "pay cuts" on a banks calculator for the first $1 Million debt, and a further 35-40K on each $1 Million thereafter. That's potentially 95K across $2 Million.

And never mind what happens if you take on non deductible PPOR debt as well.....

So to argue that the credit environment should not form a very big part of your planning when considering how to build a portfolio, or that modest inflationary pay rises and rental increases will be sufficient to address the changes.... well, good luck with that


So while I agree with you that a portfolio can be built slowly but surely, where I disagree is that it can be done without managing debt- for most people at least, who aren't going to be fortunate enough to enjoy very very large incomes or windfalls.

For the rest ie the majority - it wont be enough to just assume time and equity will get you there. It might get you some nice growth, sure. It might even get you a lot of growth. But it wont get you borrowing power to harvest that equity from growth, and grow the portfolio. It just will not solve borrowing power issues quickly enough to achieve a 20 year plan.

Consider this - with compounding 3% wage inflation for @100K salary, it will take 8,9 years just to replace 35-40K of income for servicing, which is now being stripped away/ lost per $1 Million borrowed .... add HEM's and that becomes 10-12 years just to get pre APRA capacity back. And thats for $1 Million. if you have $2 Million, it could be 13,14,15 years or more before you get any real capacity back ... of course , these timelines may shorten or expand depending on future regulatory policies, wage growth etc...but right now these are the facts based on todays circumstances.

So for those wishing to speed up that process./accelerate that process./ get ahead of the curve - they need to do more than just hope for inflation pay rises and rental increase. They need to add some accelerated repayments into the mix.... and that is why high yielding properties such as NRAS or dual occ or whatever other dwelling you can find that can produce chunky surpluses each year, will prove so valuable.

I hope you're one of the luckier few who does see big wage growth and the stars align for you... but if that doesnt quite happen for you, get in touch when you run out of puff... I'll see what I can do for you !

 

The part that struck me was that when you are at the max of your serviceability, then having bucketloads of equity (low LVR) or released equity (high LVR) does nothing: if you have $1M in cash from releasing equity - assuming the banks even allows that - then serviceability is probably still the same. It hasn't changed.
The only way to change that would be to put that $1M into the PPOR or an IP - not in the offset, but actually pay some/all of the loan off - or sell a property.
Increased rent (by itself) won't help, so putting $1M into 5 granny flats wouldn't help (much), at least until that increase income was spent to... you got it: reduce debt. Wouldn't have been more sensible to reduce the debt without the granny flats? Perhaps! Depends on lots of things, but it should be in your mind.

 

Increased rent will help...modestly. If you have enough rental properties it could potentially help more than a modest amount - but yes, all roads lead to either

Improve capacity through improving income
Improve capacity through reducing debt

Plan for it now. Too late to decide an NRAS or dual occ or high yielding property sounds like a great idea and that debt reduction suddenly matters , after all your capacity is already exhausted.

Smarter to use some of your available capacity now, while you still have it, to invest in something that will give you further capacity later. Might mean compromising on capital growth if you pursue yield , but purchasing that growth property and ignoring yield will mean compromising on borrowing capacity, meaning a smaller potential portfolio and reduced income , in the end game...

Always remember - equity doesn't pay for food - especially when you cant access it .

 

This is what i have been contemplating. I might make this $1.2 mil property our owner occ maybe later around 40/45. Basically, great house, great location and had the ability to buy it now rather than buy it when I'm 40/45 and not knowing what the price would be etc.... So this one had some emotional reasons attached to it. The good thing is that with the current debt level on the $1.052 Mil with current interest rates and the rent im receiving plus depreciation (brand new build), its pretty much neutral to hold this asset at this stage.

Now, while I'm still living at home and building the first OO home, I am able to obtain a rental appraisal for around $650 p/w in order to boost capacity and am happy to do so. I know by doing this and taking into account proposed rental income for another property purchase will allow me to borrow again for another investment property. I understand the mechanics of the repayment loadings and shadings etc... What i'm trying to decide is what type of property this should be e.g. cashflow vs negative geared, purely investment or have this as a half way OO property in 10 years time then move into the 1Mil property 10 years after that, dev site/flip (if going in with another partner) etc... Whatever the right asset selection is to reach my goals.

I am quite comfortable with high debt levels and think the $150k cash buffer is about where i need to be. I also realistically anticipate/plan that both my income and my partners income will increase over the coming years as well. I want to acquire as much property before i move out of home/have kids so as to avoid having it hurt my lending capacity.

As such, lets see if i can revise my plan given some of the feedback above.

• Goal: In 20 years, $75k net income from rent (My plan is for the partner and I to atleast partially retire so happy to work part time to make up the difference to give household income of $150k or more, lets just base this on todays dollars for now)
• Combined incomes currently $150k gross
  
• Existing rent on $1mil property = $880 p/w
  
• Rental appraisal for current property being built = $650 p/w
  
• Rental appraisal for potential new property purchase = $X
• 10% deposit down on next purchase (preferably in equity, and retain the cash, no LMI applicable as i work for financial institution)
  
• Have $1mil property paid off (either do this by savings, buy/selling or any other means necessary)

For the record, the only support provided by family here is a place to sleep and eat with no contributions to what i am doing.

Thanks again for all the responses, have been very helpful and insightful.

 

This thread may be of interest:
Working out How Many Properties are Needed to Reach you Goal