Retirement at 55 - Line of Credit

Discussion in 'Financial Planning' started by Chotu, 25th Feb, 2020.

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  1. Chotu

    Chotu Well-Known Member

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    I'm planning to have 4 properties paid off by 55, altogether worth approx 4 million with my PPOR being a 5th one and that too paid off.

    Do you think I could retire at 55 and live off some sort of Line of Credit by borrowing 120k each year, where my rental income keeps on paying the interest (I'm forecasting about 70k net rental income). The idea being that I keep borrowing off the line of credit for 10 years, and by that time one of the properties has doubled and I sell it off, pay off the debt
     
  2. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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  3. Chotu

    Chotu Well-Known Member

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    The rental income won't be enough for my annual expenditure
     
  4. Beano

    Beano Well-Known Member

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    With a portfolio of $4m unecumbered Properties I would expect a net income range of
    Low $240k high $700k depending on your appetite for management and risk

    Could you live off $500k before tax ?

    I settled for low risk low management 6.5% net
    My mates goes for 18% net (posted details on PC)
    You decide where appetite is !!!!
    Remember you can't talk yields without talking about risk (and management)
    Ps I am mainly commercial
    I base income on rentals zero on capital growth and resale.
     
  5. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Rent before expenses
     
  6. euro73

    euro73 Well-Known Member Business Member

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    Problem is... he doesn't have 8 x 500K properties, or 10 x 400K properties..... he has 4 x Million dollar properties.... and million dollar resi properties don't typically yield 6.5% net. He is forecasting 70K net...that's a 1.75% net yield on 4 Million.

    Yet another example demonstrating that all the equity from growth in the world wont necessarily pay the bills in retirement..... we have had 30 years of unbelievable growth , fueled by ever easier and ever cheaper money, yet the result is largely a class of asset rich cash flow poor retirees rather than a class of asset rich cash flow adequate retirees.... its been proven time and again over a very long period and very large sample group that that very few turn large portfolios and large growth into large incomes, yet the lessons just aren't being learned. $4 million returning 70K isn't good enough. 1.75% net isn't good enough

    If OP wants 120K per annum to retire with, they will need to consider selling, pay CGT and reinvesting the profits in higher yielding assets so that income can increase from 70K to something closer to 120K ( or better) .... or if selling doesnt appeal, add some cash cows ( resi or commercial) into the mix to improve the overall portfolio yield. If any of the properties are in NSW, perhaps add a granny flat if suitable ?
     
    Last edited: 26th Feb, 2020
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  7. Beano

    Beano Well-Known Member

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    Spot on
    Yet another example demonstrating that all the equity from growth in the world wont necessarily pay the bills in retirement..... we have had 30 years of unbelievable growth , fueled by ever easier and ever cheaper money, yet the result is largely a class of asset rich cash flow poor retirees rather than a class of asset rich cash flow adequate retirees.... its been proven time and again over a very long period and very large sample group that that very few turn large portfolios and large growth into large incomes, yet the lessons just aren't being learned. $4 million returning 70K isn't good enough. 1.75% net isn't good enough
    What you said above is spot on
    Until people get out of the CG mentality and switch to Income they will always have this problem of asset rich income poor.
    So much focus on "my property will double in ten years" .
    Focus instead on my income will double in ten years.
     
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  8. kierank

    kierank Well-Known Member

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    A problem 25 million Australians would LOVE to have ;).
     
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  9. euro73

    euro73 Well-Known Member Business Member

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    70k per annum? 1.75% returns on 4 mil? I think you are underestimating people’s ambition .
     
    Last edited: 26th Feb, 2020
  10. kierank

    kierank Well-Known Member

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    I think you are underestimating what people can do with $4M of unencumbered investments.
     
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  11. euro73

    euro73 Well-Known Member Business Member

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    I think you should read what I wrote again . You’ll find I said 1.75% return wasn’t good enough and it may well be a good idea for the OP to park it in other assets in order to improve what 4 million delivers
     
  12. sash

    sash Well-Known Member

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    On this we agree Gunga Din.....but the way to go about it we differ.

    See many people with a couple of million dollar properties...just like this...and have very poor returns.

    As I have said...lets say you have 4 $1m properties bought originally for 500k...that means a 500k profit. Hard to convert to income and hard to prevent at least 20-25% of these assets disappearing in taxes.
     
  13. euro73

    euro73 Well-Known Member Business Member

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    Even at 2 Million profits across the 4 million portfolio, only $1Million is subject to CGT. Lets say you lost 450K of that $1Million to the tax man, you'd still bank 3.55 Million...surely more than enough to reinvest at better than 70K Net returns? 4% net would get you 142K on 3.55 Mil
     
  14. Trainee

    Trainee Well-Known Member

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    Its not like they are stuck with just the properties. Just factor cgt into it and theyre off the the races.

    lot easier to learn how to generate income from a couple mill in assets than building those assets in the first place.
     
  15. Chotu

    Chotu Well-Known Member

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    What would other asset options be with a higher yield? Shares?
     
  16. Beano

    Beano Well-Known Member

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    A few years ago (4)when I first joined this forum I read about the amazing CG people had achieved and staggering buys under the market.
    I was green with envy
    Years of paying well above valuation with completely different "stock" I felt I was a failure.
    Now I see many asset rich cash poor PC investors having problems ...I realise maybe there is nothing wrong with going for cash flow.
    While the asset rich are having to sell down the cash rich investor can buy unecumbered properties every year purely from cashflow
     
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  17. spludgey

    spludgey Well-Known Member

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    What about selling one or two and borrowing against the remaining ones (so that you get residential lending rates) to buy a commercial property?

    Say you get $1.7M from the sale of two (after costs), leverage that, borrow $2.5M (assuming your PPOR is of high value as well) and buy a $4M CIP. You'll be paying around $80k in interest in the first year and $50k principal repayments in the first year, but you should easily get $240k in income from the CIP. So you'd have $275k of income per year, $120k of P&I, leaving $155k per year.

    Each to their own, but I'd much prefer that scenario. Probably not quite as simple as I made out, but you get the point.
     
  18. Lacrim

    Lacrim Well-Known Member

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    I'd much rather dump the proceeds into the stockmarket than a CIP. Perhaps margin loan a portion at say LVR 30-40%. Obviously wait for market retracements when dripping funds in.
     
  19. PandS

    PandS Well-Known Member

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    What if properties tanks in 10 years? If I am retiring I don't want to deal with debt and asset price falling if that scenario eventuate
     
  20. euro73

    euro73 Well-Known Member Business Member

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    What if shares have a bad week... like this week for example? Lots of what if's that can affect asset values..... incomes aren't quite so volatile, usually.

    Plenty of ways to use $4Million... resi, commercial, shares, etc ... but whatever the preferred asset choice , I think everyone would agree that 1.75% returns aren't good enough .