Retire on 90k/pa after tax: Your thoughts please

Good afternoon PC members,

Firstly, apologies if any of the terminology or ideas in this post are confusing or not accurate. I have only basic knowledge of all things property, I hope that you are all understanding and respectful of that.
After the purchase of our 3rd IP, my husband and I have decided I need to get serious on planning for our retirement. Countless PC posts from experienced investors echo in my head: Set your goals, decide how much money you will need to retire comfortably, and put a reasonable and realistic plan in place to achieve this.
That said, I am confused over the various ways one can acquire funds to live off their property portfolios. I have read through TerryW posts regarding LOR,LOE and the others (very informative) and really I am just procrastinating and just need to pick a strategy and back myself.

I like the conservative nature of LOR, but I am not sure how many properties I will need or the total value of the properties to be precise, to be able to execute this strategy. 5, 10, 15 properties? It seems like a long way off, but I must start somewhere. Suggestions?

I also like the flexibility of LOE, but am cautious of the bank's lending and serviceability criteria tightening up in the next 20 years and thereafter, so extending I/O loans and trying to get more when I will not be having a 9-5 job may prove almost impossible.

Something I came across when reading the strategies was living off rents, but using your equity(loc) to pay the interest of the property loans (using interest to pay interest?). This idea is new to me and I need to have an example of how it might work in a real life scenario. Suggestions? Mock example?

A bit about our situation (values and rents):

PPOR: house Mitcham paid off (1mil)
IP.1: 2-1-1 unit Croydon VIC $430k $300pw
IP.2: 4-2-2 house Griffin QLD $450k $430pw
IP.3: 4-2-2 house Thornlands QLD $510k $475pw

My ideal scenario would be to have 6 properties collectively worth $2,750,000 (unencumbered) and yielding 4%pa.

I already have $1,390,000 so I would need a further $1,360,000 worth of property. Thoughts on buying 3 more properties $453k (approx) each over the next 5 years?
So by 2023 I would have my 6 properties, and some CG thrown in as well, maybe $500k conservatively it would have risen by over the entire portfolio.

In fact, $2,750,000 + $500k = $3,250,000: yielding income of $130k before tax.

I now need to find a way to pay down the loans quickly, or is there another options? Suggestions
please.

I understand any advice in the comments is general in nature and I will seek advice from a professional in regards to my own personal situation. Just hoping discussion among like-minded individuals may help me clear the fog in my head and make a difference to others who may be in a similar place to me.

Thanks all.

 

What are your holding costs? You will likely pocket closer to $100k after all expenses before tax.

To pay them off you either need to use income (job/business/rent/other), unless you have a hugely successful business it is unlikely to be quick. Or proceeds from sales/capital gains, some people like to buy twice the properties they need, wait for a cycle to deliver capital gains and then sell down until all the loans are gone.

 

I estimate holding costs $150k/pa interest on loans, $6k per property for regular expenses such as rates/insurance/maintenance ($36k) $186k total per year.

 

Or proceeds from sales/capital gains, some people like to buy twice the properties they need, wait for a cycle to deliver capital gains and then sell down until all the loans are gone.[/QUOTE]

I prefer this option, but can't get my head around buying so many properties, this would mean 12 in total, sell down up to 6 of them to pay the loans off, if I have understood it right? What is a realistic time frame to do this? If I bought one every year, then it would take me 9 years to get to 12 properties (2026) then re-evaluate and pick the ones with not-so-great performance and sell them first?

 

Yes one strategy is to buy double the number of properties you need and then sell half to pay off the rest.

But you can tweak this by only selling 1 every 5 years or so and squeezing more growth out of the others you would have sold.

also you could possibly set up a large LOC before retirement and then use this to fund the repayments on the loan while you live on the rents but once this LOC runs out you won't be able to get finance again.

 

Yes, indeed. How large LOC are we talking @Terry_w ? It would have to be quite substantial. If I wanted it to service the interest for two years, that would be 2 x $150k = $300k. I would pay the interest owed on this LOC by the rental income also (If we have retired) and that would be approx $14000 per year. It is looking gloomy for my dwindling income from rents (I am still basing my figures on 6 properties, maybe I should double that.)

 

I like to keep it simple. Invest for the best CG and add value deals as much as possible. The name of the game is CG and or manufacture equity. If you focus all your energy on those two things while keeping a sustainable yeild and your overall financial position in mind, you'll build a decent amount of wealth over time which can easily be transitioned into good CF later on.

Just my take.

 

As large as possible without incurring LMI.

 

It was my first instinct to keep it simple as you say, I just hoped I could think about the end game and be more prepared rather than procrastinate as I m known to do. The set and forget acquisition phase is sound, I'll keep my eyes on the bigger picture.
Thanks for your thoughts.

 

It is hard to reduce debt when your net yield is only 3.6%
Riskier but perhaps CIP with a higher yield

 

Another thing to consider is how old you are and how much do you want to leave to your kids (or anyone else)?

For instance if you amass the unencumbered $2.75mil, and you can expect to live another 30 years without leaving anything to the kids. That gives you the $90k PA anyway.

 

Commercial property? I am a bit risk adverse but may look into it if necessary. Thank you.

 

There are commercial property investments that are less risk than residential

 

Is it the higher entry costs, that people sometimes see a comm premises vacant for longer periods (depending on property of course), or that comm property isn't done as much by the 'mum and dad' investors that makes people think that comm property is riskier?

 

Like everything there is a very wide range ...each property has its pluses and minuses
The commercial property I brought last year has a 6.4% net yield (so at the lower end of the yields) with almost zero risk of default (tenant has spent 2.5 times what I spent on the property (40 years of rental within a couple of years) ..he is unlikely to abandon his investment and business! ) ...rental growth will be zero for at least 12years (reviews are 12yrs)
There are many features of commercial properties and have lower risk the market has priced the market yield lower (note: market not passing)

 

Another strategy people take up is buy properties that has potential to build a new dwelling at the back or on the side.
Once they accumulated 3 properties, let time do it's magic. When ready to consolidate, build 3 new dwellings on the existing property. You only need to come up with the build and subdivision cost, which could be 130k for a 2 bed granny flat, or a 180k full sized home. The land is for free ( not really, but you know what I mean )

In VIC, there are alot of GRZ zoning will allow this.
In NSW, WA, QLD (certain council) allows granny flat but only on same title as existing house ( different council allows dual occupancy and multi dwelling that can also achieve this)

So if your existing 3 properties were orchestrated earlier so that you can build a new dwelling, then you only require 3 x 130k-180k =390k-540k additional fund

Ability to subdivide the new dwelling is a bonus..as it allow you to sell them starting with the older dwelling in your retirement phase.

 

Some strategies already mentioned.

However, if you want to get to your end goal in shorter timeframe then you probably do better if you become an active investor, not set and forget

Buy properties where

you can add value, renovate/develop, its not difficult once you start doing the homework. what may appear difficult today, may be very easy tomorrow. Its about stepping outside your comfort zone.

look at buying only in rising markets, then sell down prior to peak and keep finding new markets

diversify into many markets that are rising, but keep the timeframe short, and either reduce debt or recycle into new projects. this strategy requires patience, because you only buy when the market starts rising.

review your current property portfolio, anything that should go, not performing, can you make that money work faster for you today if you sold.

Lastly start networking with people who are using strategies that will help you move forward.

I am not a fan of the LOE model I have yet to meet anyone who has successfully managed to nail this one. Its flawed. Plenty of threads on this one.

MTR