Strategy help

Discussion in 'Investment Strategy' started by sigi, 28th Mar, 2017.

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  1. sigi

    sigi Active Member

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    We're getting ready to buy our first IP and I need a bit of help with our investment strategy. Our two main goals are as follows:

    In 15 years - $45000 in passive income ($1.1 million in unencumbered property returning at least 4% net)
    In 25 years - $75000 in passive income ($1.9 million in unencumbered property returning at least 4% net)

    In theory I know how to get to the first goal (acquire 7 properties at $275000 each, sell 3 to pay off remaining four), but how do we get from this to the second goal? Would we just start the acquisition process over again at this point? Or is there a way we can use equity for the $45000 and still continue acquiring property?

    Thanks!
     
  2. Btaylor

    Btaylor Well-Known Member

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    Selling houses to then buy more houses doesn't make sense to me. I would say keep acquiring houses as long as you can and only sell when you're ready to retire eg. When $75k P.a. passive income is possible. Just my two cents.
     
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  3. sigi

    sigi Active Member

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    The problem is that my husband is older than me and we want him to be able to semi retire about 10 years before we both fully retire.
     
  4. Dan Donoghue

    Dan Donoghue Well-Known Member

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    The 4 properties remaining after you sell 3, are they likely to go through a boom cycle in the 10 years between your husband and yourself retiring?

    Do you think they would go up in rent over those years enough to give you the 75K you seek (75% growth or 5.8% PA compounded).

    I echo the sentiment however that a better idea is to hold on to all until you both retire.
     
  5. Anthony Brew

    Anthony Brew Well-Known Member

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    It looks like you want to have your cake and eat it too.
    I would think that you have to choose between less cash after his semi-retirement and let it grow more or more cash available and sell more properties to reduce debt.

    Is there any problem with compromising and after 15 years just reduce debt instead of wiping it out totally?

    For instance, after 15 years sell just 1 or 2 so that you can have some of the rental income to supplement your income during semi-retirement and let the rest of the rental income continue to pay off some debt while letting the last 5-6 keep growing for another 10 years more?
     
  6. sigi

    sigi Active Member

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    Thanks Anthony, just reducing debt sounds like the right kind of idea. I guess we will have to find a balance between accessing some passive income and keeping hold of a growing portfolio.

    I have trouble getting my head around the kind of numbers we might be dealing with in 15 years!
     
  7. sigi

    sigi Active Member

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    Is there a way to try and predict this? We'd be talking about between 2032 and 2042.
     
  8. Anthony Brew

    Anthony Brew Well-Known Member

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    Oh if it is just getting the numbers, there are definitely people who can help with that if it is not your thing.
    Not sure if they will offer advice for free (they might) but yes some people are highly adept at that.

    Ask them to lay out their working clearly with explanations so that you can modify the numbers yourself to give you different outcomes for you to compare.

    Eg
    - try it with 2% inflation vs 3% inflation
    - try it with an extra 2% in interest rates to make sure that you will not have serviceability problems in semi-retirement and see the difference in what you can reasonably do while still being safer.
    - try it with 4% expected growth vs 7% growth (or whatever you think is worst case vs average case)

    The last one is a difficult one for me personally since I don't really know what is considered average and what is considered conservative.

    Anway, once you have their working out explained and how it is done in a simple way, you can try out a range of scenarios to get a feel for the dollar ranges you should be looking for purchasing and for holding after semi-retirement to meet your end goals.

    Maybe people here can give recommendations of someone qualified if that is what you need.
     
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  9. Dan Donoghue

    Dan Donoghue Well-Known Member

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    There is no way to 100% predict the future of investments (God I wish there was). But if we look to history, we can work out some sort of pattern and we can make an educated guess that a cyclical pattern will continue.

    Look at your chosen areas, look at the past data, look at future developments and potential for the area.
     
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  10. Perthguy

    Perthguy Well-Known Member

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    What is your strategy though? Is it to simply buy and hold? Or are you looking at adding value and cashflow though renovations and/or building?

    It also depends on how much you can afford to put into the investments each year.

    If you could do a couple of retain and build projects in Perth, where you renovate the front house and build out the back, you may be able to reach your goal faster. Then there is the next Sydney and Melbourne boom cycles where you may be able to pick up some strong capital growth. Timing will be tricky.
     
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  11. sigi

    sigi Active Member

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    We're looking at adding value through renovations and retain and build. Definitely want to take an active rather than passive approach.
     
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  12. sigi

    sigi Active Member

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    If we go down this path, would it make more sense to hold on to the new builds for the equity/cashflow or to sell them to pay down debt?
     
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  13. Perthguy

    Perthguy Well-Known Member

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    My opinion is this but you should get personal tax and legal advice because the tax on developments and renovations can be very complex.

    Personally I would look at selling the retained house. It really depends on the area but houses in some areas can work like this: buy the house that needs a good renovation on a big block. Renovate and subdivide and build at the back. In some areas the renovated house, if renovated well and landscaped, will sell for close to the purchase price of the original purchase. So you can sell and pay down a lot of debt. You don't have to sell immediately either. You get a good boost on cashflow from the increased rent after reno and depreciation benefits on both the renovated house and the new build.

    If you can hold both the renovated house and the new build through a period of strong growth, after selling the front house you will be a great step ahead.

    Issues to be aware of when selling: apportioning value between the existing house to be retained and the new build, CGT may or may not apply, GST may or may not apply to the renovated house etc. Personal tax and legal advice is required. This is not an area where the average property investor would be able to DIY.
     
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  14. sigi

    sigi Active Member

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    Thanks very much. :)
     
  15. Chris Au

    Chris Au Well-Known Member

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    There are many times when selling is the preferred option. eg buy, hold renovate, sell will return more in a shorter period of time in many cases then buy, renovate, hold, allowing you to go again. There are many threads about holding vs. selling.

    Unless you are looking to buy quite a new property, the maintenance costs will eat into your profits. Older properties do well in many of the active investing scenarios (buy, renovate, hold/sell, buy, subdivide, hold/sell, etc etc) for various reasons. 4% net will require very different gross yields depending on whether you buy a newer vs. older property.

    Agree.

    Talk with a mortgage broker about how much you can buy in various scenarios under the current regulations.
     
    Last edited: 28th Mar, 2017
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  16. Perthguy

    Perthguy Well-Known Member

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    Also, just putting it out there to consider listed securities as well as property for passive income. For example, a portfolio of equal rating of Argo Investments (ARG), Milton Corporation (MLT) and Vanguard Australian Shares ETF (VAS) has a long term dividend of 6.21% per annum.

    I don't know how much you can afford to contribute, but let's say you could afford to invest $10,000 per quarter in the portfolio above. The idea is that you would reinvest the dividends.

    According to this simple calculator, which doesn't take into consideration franking credits (assuming 6% interest, $40k yearly, starting with $10k):
    - you would achieve your goal of $45k passive in 14 years
    - you would achieve your goal of $75k passive in 19 years
    - after 25 years, your passive income would be $124,387.

    Free Compound Interest Calculator | Noel Whittaker

    In reality, you would achieve your goal of $45k passive sooner and have a higher income after 25 years. The calculator doesn't take into account franking credits, which are important in this scenario.

    I am not suggesting you invest only in listed securities or that you buy the LICs or ETF that I have used as examples, just showing you there is more than one way to generate passive income.

    Personally I am planning to have property, LICs and an ETF or two.
     
  17. Anthony Brew

    Anthony Brew Well-Known Member

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    Just out of curiosity, do you know a ballpark figure for cost to to build a whole new house after subdividing?
     
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  18. Perthguy

    Perthguy Well-Known Member

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    It really depends. It can range from $150k to $350k++. Single storey is cheaper than double storey, brick veneer is cheaper than double brick, 3 beds cheaper than 4 beds, low end finish is cheaper than high end etc.

    BMT has a very useful construction cost estimator to give you some guidance.

    Construction Cost Calculator & App | BMT Tax Depreciation
     
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