Retiree keen to achieve financial independence

Hello everyone,
I am very excited to join this forum, which I discovered this evening by accident, while browsing the net.
I am 53 years old, retired since Jan 2016. My husband and I own a residential property portfolio currently valued at about $10M, against some $2M debt. My new job in retirement is to become debt free before I turn 58
I have managed my tenants for over a decade now. I also lease two of my properties for short term holiday stay.
I am looking to buy one or two more properties over the next 12 months, ideally positively geared, in areas of good capital growth and on sizable land, so I can renovate, subdivide and sell to help achieve my goal.
I am very keen to learn from the knowledge and experience of fellow investors, and look forward to contributing to discussions as well.
Daniela

 

Welcome on board.
Would love to hear more about your story and how you got to your current financial position.

From your introduction you could well be teaching most of us more than we will be teaching you

Blacky

 

So you mean you want to pay off your remaining 2 mil debt without selling down any of your properties?
Otherwise, you could be debt free with 8 mil of property right away.
You could even do nothing and likely have more than 10 mil of fully paid off properties in 5 years with no debt.

Just wondering what the reasoning is for being completely debt free, debt is not bad at your levels.

 

Daniela, welcome.

Surely you jest.... you've already achieved financial independence by nearly any measure. Well done.

The yield on that size portfolio with such a low LVR will surely already be taking care of itself & providing a multi 6 figure income stream. That's more than most will achieve or realistically want to attain.

 

Why do you want to pay off the remaining loans?

 

Daniela, you're in a great position! Wondering, whereabouts are your short term rentals?

 

Thanks Blacky for reading my post.

We started with nothing, literally. Bought our first home as a very modest two bedroom cladding building in a poor Sydney suburb, which we improved by renovating and extending, and sold two years later. My rule is buy the worst place where you can add most value. My husband and I have held two jobs for many years, and we have always been very involved with the renovations as well. I would buy all the materials and he would manage the project and work with the tradesmen. We've worked incredibly hard, for many years!

 

Sorry for being ambiguous. I don't want to sell any of the properties I currently own, but am looking at selling the two I intend to purchase in the next 12 months, within my 5 years timeframe, to help me pay off the 2M. By my calculations, the rental income will not be sufficient for this, even if the current low interest rates don't go up. I would appreciate if you help me understand how I "could even do nothing and likely have more than 10 mil of fully paid off properties in 5 years with no debt."

 

Agree, it would take care of itself but would not pay itself off in my five years timeframe, by my calculations. Sorry, I should also add that while my husband is still working, he promised to retire too in mid-2018.

 

Im guessing the assumption would be something along the lines of;
$10mil value at 4% net returns = $400k/pa
$2mil loans at 4% = $80k/pa
Gives you $320kpa in debt reduction.
5x $320 = $1600.
Accomdate for lower interest costs as the debt reduces each year, and throw in a few rent increases and you are debt free pretty easy within 5 years. However the assumption is 'stand alone' and does not take into account your personal situation.

Just my guess.

Blacky

 

If your properties were to achieve a very low combined compound growth of just 20% in the next 5 years, you'd have 12 mil of property with 2 mil debt, if you don't pay down any debt in those 5 years.
Then sell 2 mil of property and you have your 10 mil of debt free property left over.
The likely result would be much better than this as long as you have decent properties, or can pay down some debt with your great rental yields in the meantime.

 

Good question!

Years ago, I used to like getting closer to my financial goals using the banks' money. These days, lenders' attitude has changed dramatically and I don't like being at their mercy.

Also, by nature debt makes me work harder and 'tighten the belt'. Although I would no longer need to do so, psychologically I would find it difficult to change my attitude.

Finally, I have always valued moderation. I want a comfortable life but don't aspire to unnecessary luxury. I want to draw a line before life draws it for me, if it makes sense.

 

Sorry Gockie, you mean where I advertise them or what the return is? I advertise in Stayz, AirBnB, TripAdvisor, etc. I use a channel manager to manage my bookings. The return is about 8%, clear of tax and expenses.
If you meant something else by 'whereabouts are the short term rentals', please let me know.

 

Thanks Blacky.
You are not too far off the mark, except that your calculation does not consider our living expenses?! With my husband no longer working, and us actually wanting to also enjoy retirement before the five years are up, from experience the debt would finish up needing about 10 years to pay off?!
Also, I haven't mentioned that we are also substantially helping our family, which we will have to continue to do for sometime.

 

What I own so far I don't want to sell; they are two complexes that we own entirely (with the bank), and there are no other owners. To sell something means to have someone else being part of the decision making on how to manage the complex, which in my view might be more trouble than it is worth, in the long term.

But I agree with your strategy, for the two new properties I intend to purchase this year. What I pay off from my rent, plus the capital appreciation and value added materialized on selling the two new properties, by my calculation should help me pay off the 2M in 5 years.

 

Oh. So you ONLY own two properties
(Sorry - inside joke referring to god only knows how many questions are asked about 'how many' - to which many seasoned campaigners respond saying the number is irrelevant...)

Anyway - I would imagine at that level you would be drawing some level of living/lifestyle from the income.

I think if you buy-add value - sell you would be able to clear off that debt pretty quickly.
I imagine that you have a decent amount of equity/capital that you can draw from so financing deals shouldn't be an issue - especially if you go commercial finance over standard resi - where servicing shortfalls can be met by capital adequacy.
In that position you could be looking at the deal of a lifetime every day.

You have loads of options which can be a negative as much as a positive. So you'll need to do some homework to narrow down your search criteria. But really... the world is your oyster.

Curious- how did you come to own two entire complexes? Did you develop them yourselves?

Blacky

 

Hi Daniela

Welcome to the forum it's always good to get some new blood (so to speak)

I can identify with your frustrations re debt reduction which always seems harder than simply an exercise on a spread sheet.

Looking at Blacky's numbers he seems to have missed some vital figures.

We allow and unfortunately spend about 25 - 30% of gross rent on expenses and have been doing so for years. This covers the council rates, water rates, land tax, very limited repairs, management fees, insurance and strata just of the top of my head.

So based on the initial figures we have $400k/pa - $120k expenses - 80k interest - tax(maybe $70k depending on your structure) leaving about $130k to be distributed and possibly taxed again in the ultimate receivers hands. Not likely to reduce a $2mil debt in a hurry. Particularly if you are using some or maybe quite a lot to live off and help others. Don't get me wrong it's enough to live off but just doesn't cut the debt.

As a result I can see the logic in wanting to increase the portfolio and get further capital gain to counter the future debt. If you had taking this decision back in 2011 -2012 then as good and well as basically properties in Sydney have doubled since. Unfortunately it will be some time before the next jump and it may be beyond your 5 year time horizon. You can go and chase alternate markets and hope that they still have a substantial jump left in them but the financial markets may turn and have done so in the past with not all markets around Oz getting a go.

The other thing to consider is will you be able to get a loan for a further $2mil under the current APRA rules. I am sure some others will be able to advise.

One thing that you could pursue is the granny flat idea. Are any of the properties in the current portfolio on blocks that can accommodate a granny flat. Based on a $100-140k investment the returns are well above the current market returns and thus would increase your gross income over and above the increase in expenses.

Anyway these are some of my thoughts re your outline I can appreciate where you are trying to head but feel that it may be the wrong time \in the market and as such you will need to manufacturer income rather than capital growth be it that with increased income will come a comparable increase in capital.

 

@Daniela, welcome to the Forum. You and hubby have done well.

We are in a similar situation to you - both my wife and I are retired, we are both 60, we are getting more risk adverse as we age, ...

So, I do understand your attitude towards debt. Instead of paying back our debt on our remaining loans, we have Offset accounts. In our case, two Offsets are full and a third is well on its way.

In our eyes, this debt is paid back although technically it is not. The advantage to us is that we can withdraw the money in the Offsets for any reason (eg renovations, holidays, new car, help our children, ...) and we don't have to ask the banks for their approval (our main reason), the interest is tax deductible (a second good reason) and we can manipulate (to a certain degree) how much tax we pay (always a good reason).

You seem a very astute investor. I am sure you considered Offsets.

In case I am missing something, why did you reject Offsets and are choosing to actually pay down your debt?

 

I think I am missing something.

You could sell off property, pay out loans (as bring debt free is important to you) and have $8m in property free and clear?

So long as you maintain majority ownership in complexes you will always have final say in any decisions. Sure, you might have to listen to other ideas (and who knows, they may be good ones) but will win any decision put to a vote.

Even retiring at 50 you can't live long enough spend all your money.
Marg

 

Welcome to the site ,and after reading your first post you would not be looking over the shoulders of more experienced property investors then yourself within this site ..

Maybe look at it like this ,at 53 you have both done very well,you work out how many weekends you have left in your life,and by the look at those numbers where there would be no potential of a cash flow crunch maybe just sell down now carry no debt,employ a PM and just sit back because with a income generation strategy that you have already in place just enjoy your life..imho..