Retiree keen to achieve financial independence

I'm not only suprised, I am flabbergasted. Many here aspire to a retirement income of $100K to live a carefree retirement lifestyle full of luxury travel and here you are with $8m net assets, which at a conservative 4% return rate, would net you 2-3 times such an income after tax and that is apparently not enough to support your lifestyle. Wow!

You don't need to clear debt as what debt you have is low and manageable. Instead, you have a spending efficiency problem to fix. My suggestion is for you to realise what a ridiculously good financial position you are are in and to optimise your expenses accordingly to easily give you the luxurious lifestyle you seek.

 

Do you think (personal opinion only) using $$$ in offset accounts or borrowing against IPs...thus incurring interest@circa 4-4.5%, to invest in ETFs, LIC's etc is better in the long term than leaving the money where it is?

 

I think it is always better to borrow to invest if you can.
If you use cash to invest the interest on the loan associated with it will increase anyway so there is no immediate direct tax advantage as long as the rates are the same.

But the advantage comes later if you want to use the cash, such as on an early retirement.

 

I didn't know about commercial financing

Thanks Balky. I didn't know I could go commercial financing, so will keep it in mind.

The complexes are quite unique. One is a former mansion, built in the late 1800s. Bought it in a very derelict state (literally unlivable, but exceptionally solidly built outer cell) and renovated. Checked historical records and found out that years ago was used, with Council approval, as three separate dwellings. Applied to Council for approval to be used as multiple dwellings (3) and was successful. Could strata title and sell separately with only minor amendments, but we don't want to.

The second was also a very dilapidated house, but with 500m2 vacant land at the back, on separate Lot. Got approvals to build two semi-detached houses on the back lot, as well as renovate and extend the front one. Used the existing driveway to gain back access, by re-structuring the sub-division. Decided not to strata the new dwellings, to reduce CGT.

I love the properties and hope we never have to sell them, hence my $2M debt dilemma. They are the kids' inheritance and, like us, they are very attached to them as well

 

Sorry, but $2m debt is not low, in my opinion, given that I never want to be forced to sell anything I've accumulated so far.

 

I know we are not supposed to "love" our investment properties but if I had those, I would want to keep them too!

Depends on how you look at it. As a proportion of your total assets, it's quite low. As a number you feel like to you have to pay off, it's high!

I think it will take a lot of work to get rid of that debt. I am not sure if you need to address cashflow or capital or both! It won't be easy though, especially in 5 years.

Instead of relying on capital growth, which can be unpredictable, would you be prepared to build?

For example, buy an old house, knock it down and build 2? That way you are manufacturing equity instead of relying on capital growth. The idea would be to keep them for a while then start progressively selling them down, say one a year.

For example, something like this could be knocked down and build 2. Except it could be in a slum! I don't know Hobart.

35 Continental Road, Glenorchy, Tas 7010 - View Sold History & Research Property Values - realestate.com.au

 

Focus on your LVR, not your debt amount. A 20% LVR is very low. Surely you had a much higher LVR while you were building your portfolio, and you must have been comfortable with that to stay the course. 20% is very low risk that you'll ever have to sell anything.

 

Sorry but IMHO $2M debt on a $10M property portfolio is low. It is 20% LVR, FGS.

We are retired, have a lot more debt than you and our property portfolio LVR is 50%, total asset portfolio LVR is 30%.

I am not trying to be rude but everyone in Australia would kill to be in your situation. Stop sweating the small stuff.

 

Daniela,
Congratulations,
You are in a very enviable position (despite your debt concerns).
Take advice, soak it in for awhile,
But ultimately, do what you feel is comfortable for both of you going forward.

Peace of mind over concern anyday.

 

Each to their own. I thank god I'm not needing to pass on $8m to my kids or even $1m. That'd put an end to my semi-retirement, which I'm absolutely loving and managing on a lowish cash flow. Threads like these remind me how different we are. Can't help thinking how sad it seems to be unhappy with $8m and feeling you have to have a frugal lifestyle and hussle endlessly, so as to be able to pass a couple of (very nice I imagine) buildings down the generations. I seriously wonder if spending some time volunteering in the third world would put things into perspective a little morefor you. Absolutely each to their own though, and congratulations on your success.

 

I, and my siblings, would have been devastated had my parents curtailed their retirement plans just to pass on more money or assets to us. Thankfully they enjoyed a long retirement and many lengthy overseas trips before being restricted by ageing.

And, in turn, our own children are encouraging our travel plans, all continually assuring us that they are doing very well by their own efforts and don't want an inheritance (of course they will get something!). So business class, here we come!!
Marg

 

I knew a guy at work. In his 60's. Hates his job, comes in everyday head down. Sits in his office doing next to nothing, having delegated all tasks to others. Lives in one of the worlds most boring and isolated towns and looks to be on the verge of a heart attack due to lifestyle choices. Lives in a huge, expensive house filled with art work. Go figure. He hates the town and his job but wants the salary, wont sell the house or art to make the life he dreams of possible. Assume he'll leave it to someone in his will. Extreme example and different to the op but still, without selling down it's hard to make enough guarenteed income from property after expenses...and if your wants list becomes ever increasing...

 

Very interesting.

I can understand your reluctance to hold the debt. Weather it is too much, enough, or not enough is up to you to decide and no one else. No one except you is walking in your shoes.

Commercial finance has pros and cons. Most cons being low LVR, higher cost and harder to find a decent broker/banker who will work with you and knows what they are talking about.
However it also has its benefits especially with higher portfolio values and out of the box solutions.

Blacky

 

Commercial finance normally has higher interest rates and also only allows max 60% lvr. Residential finance kills it hands down.

Personal story dating back to late 1980's Westpac signed me up for a 'Commercial' loan for an IP. The interest rate was actually 1% less than the equivalent residential loan. Interest rates rocketed up just after with residential loan interest rates stopping at 17% but mine kept going up and finished up at 24%. I only had this loan for 6 months but when I refinanced had to increase loan amount by 20%. The residential interest rates were controlled and limited by the Government, commercial loans were laissez-faire.

Very interesting properties. Always wanted to get one of those big 'mansions' around St peters Summer hill etc but moved on from that idea way back. Whereabouts are your properties?

Cheers

 

Congratulations Daniela on such a major achievement! You are blowing us all away with your story and your $2m headache is one I would love to have as well.

I would be curious to know two things about the jointly-owned complexes :
1) What level of annual land tax do you pay for each complex
2) What level of unrealised capital gain is there on each one….ie would sort of profit would you stand to make if you were to sell each complex (even though I know you are not going to do this) ?
Only if you feel comfortable sharing of course.

I suspect your boys will not only inherent two awesome properties but also some significant tax issues once these get passed down to the next generation. Keen to hear peoples’ thoughts on these points.

 

I don't think the issue is a debt issue as such. It seems more like a cashflow issue. While the complexes are amazing, they realistically are not going to provide the returns that the family is after. The return on equity is simply too low. While other posters have just said 'sit back, do nothing and enjoy life', I really don't think this is an option.

Basically, the family need to create a reliable income stream. I am not sure this can be done within 5 years but in a way it's like starting over again. The great thing is they already have a decent amount of money coming in from rent and also a high level of equity to borrow against. The current plan is to buy and hold and hope that capital growth will make up the shortfall. I am not confident this will happen in 5 years.

I have been trying to think of ways to set this up. I think development could be a good option but I am not sure the family wants to build houses. That's what I would do.

I would probably build a duplex in Hobart, another duplex in Hobart, duplex in Adelaide, another duplex in Adelaide then see if Perth have started to move and do two projects there. If Perth is still a no go zone I would evaluate and see where might have potential. But realistically, I would do this after each project. Evaluate where is best to make the next move.

It's a lot of work but should create a nice income stream and also good gains in terms of capital growth. Only problem is that it is a 10 year plan. I don't know. I really have a problem with trying to solve this in 5 years.

 

Both are in Sydney, relatively close to the CBD.

 

Apologies if I confused everyone. I don't reject Offsets at all! I find them a very valuable tool, for the reasons you mention as many others, and every single dollar we have goes in there. It is just that I don't have the $2m I owe to put in there, but am working on it

 

Then have you considered doing Airbnb in at least one of the buildings? The workload will be heavier but the returns should be much greater, especially since you already self manage so must live not too far away?

I should imagine staying in a heritage mansion would be appealing to guests?
Marg