What now?

Hi folks.
Thank you very much for your response.
So, as much as I can see majority suggest to use leverage and keep investing.

Not my cup of tea, probably with lP but not with PPOR, it must stay intact and safe.
To be honest with you l am too scared and to conservative to put it in any danger.

This post is about my next steps.
I forgot to mention my target.
I would like to be secure in future, to have enough money when l retire and not depend on government handouts.
I am a quite simple guy. My hobbies are trekking, kayaking, roses and everything about nature so it's not expensive, also I am not too much into fashion or cars, so all together l believe
50 000 p.a. should do the job.

I took some books about money from library but I need something more specific about properties in Australia.
What do you suggest?

All together, in next 20 years, how to make 50,000 p.a. investing in properties?

 

If everyone had followed the advice from the experts about leveraging 4 or 5 years ago, the country's banking institutions would be in a right mess! Oh um
In the current climate, the average investor is better off owning larger portions of fewer properties and having lower and fewer repayments. Anyone who says otherwise still hasn't connected the dots.
If you're a high income earner, different story...maybe.
@Zixo you've started a great conversation which hopefully brainstorms some ideas for you. However, at the end of the day, you have to live with your own risk profile, your own Sleep At Night Factor, and any repayments you have to make.
I suggest you quietly read, read, read for a while. Also, look at some cities and/or towns where the prices have come off their highs. Can you work any of these places into your life and /or strategy in any way?
To me it reads like you already have a strategy. Don't let randoms tell you you're wrong - they're probably selling something. And to do so they need people to think they don't have any idea. You do have an idea, you just don't know what it is yet.

 

G’day zixo. 50k p.a you will roughly need 1million. How old are you?
Leverage and risk is not your cup of tea so perhaps just salary sacrifice additional into your super. If it has to be property you will get about 40k p.a per 1million paid outright through rentals

 

Achieving 50K per annum over 20 years is quite straightforward, but I don't see how you can do it without using some equity in your PPOR - unless you have cash reserves to pay for the deposits + stamp duty, you will need to utilise the equity in your PPOR.

In order to use resi property to achieve a 50K income in 20 years time, you need something that generates a CF+ surplus - even when set up under P&I repayment terms. This way, you can just set about paying them down over 20 years without having to put any of your own after tax income towards them.

The best solution for this is dual income. Unfortunately you cant really do that in your home state of VIC, unless the granny flat is a dependent person unit. Its very limiting

So NSW is the best bet as granny flats can be done anywhere as long as they dont exceed 60M2

Let me give you a hypothetical based on the dual occ's I sell. Just so you can see a properly articulated set of numbers . Say for example you bought one of them at @580K (180K land. 400K construction) You'd need to use PPOR equity to fund 20% (116K) + the stamp duty (4.5K) + legals (1.5K) So that equates to @ 122K . That debt would need to be secured by your PPOR

The remaining 464K of debt ( the other 80%) would be secured against the property you were hypothetically purchasing. So you'd have a total of 586K of debt. ( 580K purchase price + 4.5K stamp duty +1.5K legals).

These properties run at @ 7-8K CF+ under IO terms, but you could simply set them up as P&I from Day 1 and let them run at 2.5-3K CF+ instead. That would generate sufficient surplus to allow you to pay an extra 200 per month onto the loans. However, if you also used the money that you previously used to make your PPOR mortgage repayments ( I'll say $1500 per month for the purposes of this hypothetical) that would allow for you to maintain the P&I repayments and also make extra monthly repayments of @ $1700. ($200 + $1500) That would be sufficient to pay down the entire debt - the 122K secured by your PPOR and the 464K secured by the dual occ- in less than 15 years - a full 5 years ahead of schedule.



These properties currently Gross @ 650-660 per week, so @34K per annum. Expenses are @ 4K per annum. So if the rents doubled in 20 years , and the expenses also doubled in 20 years, you could be generating 68K per annum with @ 8K of expenses, leaving you with a taxable income of 60K , or a NET income of @ $48,953 or thereabouts. Not bad going - especially when you consider that this is achieved even if the property market shows zero growth for the next 15 years.



If you looked at a slightly more aggressive hypothetical where you deployed your dormant equity towards two purchases instead of one, you'd have $1,168,000 of total debt, with 244K secured against your PPOR. Before you freak out about those numbers - look at the math. In this hypothetical, you'd now be able to pay $1900 per month towards the debt ( $200 per month from the surpluses generated by dual occ #1 + $200m per month from the surpluses generated by dual #2 + $1500 per month that you used to put towards the PPOR repayments )

This would see the debt paid down in 19 years and 4 months ( again - less than your 20 year target) - see below. But it would see you with a GROSS income ( after expenses) of @ 120K, which would equate to a NET income of $87,968. - or perhaps a few K more if the "one size fits all" 32.5% marginal tax rate proposed by ScoMo gets up. See below





Point is, this hypothetical demonstrates how you can safely deploy PPOR equity and see yourself set for life, using what is essentially a property dividend reinvestment plan. So being afraid to use your PPOR equity is really only doing you a disservice and curtailing your options.

And of course, if the $1500 per month for PPOR payments which I have assumed is an underestimation, these numbers will only get better!

The other thing you could consider- subject to seeking the appropriate advice- is to leverage into something using your SMSF ( if you have one and if its appropriate for you ) The property dividend reinvestment approach can be very powerful in an SMSF, because of the effects of leverage.

Again - here's a hypothetical to demonstrate what I mean. Using a 580K dual occ as an example once again.... an SMSF would borrow 70% - $406,000 and it would be required to contribute 30% ($174,000) + stamp duty ( $21,867) + legals ($1500) for a total contribution of @ $197,367. Call it 197.5K

A loan of $406,000 ( 70% LVR) would be required. Assuming a rate of 6.5% ( SMSF loans are much dearer - banks are gouging but nothing we can do about it )

Now, if you decided to purchase this way instead of in your personal name, and paid an extra $1500 per month ( 18K per annum) into your super as a concessional contribution, instead of using it to make extra repayments towards a property purchased in your personal name, you could pay down the 406K of debt in 12 years and 3 months. Really powerful stuff. But you cant get at it until pension phase.





So there's one final hypothetical worth considering. A combined approach - where you purchased one in your personal name and one through your SMSF, and distributed the $1500 that used to go towards your PPOR repayments on a 50/50 basis ie - you paid an extra $750 per month towards the property in your personal name and also paid an extra $750 per month ( 9K per annum) into your Super as a concessional contribution.

The property purchased outside super would now benefit from extra monthly repayments of $950 ( $750 + $200) and this would result in the 584K of debt being paid down in @ 18 years and 4 months ( under your 20 year target) leaving you with @ 49K net income in your personal name



The property purchased within your SMSF would have its 406K of debt paid down in approximately 15 years , leaving you with a 60K income inside your SMSF, which would be taxed at 15% before pension phase ( so 51K net) and become 60K tax free in pension phase.....



However you view it - each of these hypotheticals should demonstrate how effective a property dividend reinvestment plan can be over a 15-20 year period, even with zero growth. The onl;y one you could realistically consider if you are dead set against using PPOR equity, is the SMSF strategy...if you have sufficient resources to do so ( you'll need @ 250K ) and again - subject to seeking appropriate advice .

You just arent going to get close, any other way.....

 

These are two good books that are fairly recent that worked for me:

Armchair Guide to Property Investing: How to Retire on $2000 a Week - Kingsley and Holdaway

The Property Puzzle - Stuart Wemyss

 

Thank you all for your responses and advice about books.
Euro73 thanks for all informations and time spent on perfect explanation.

Well, after all it looks like l have to use equity. In this era it seems impossible to live without banks, one way or another.
Goodbye to idea of freedom and days of daydreaming!
At this point l ruled out investing in anything outside melbourne.
First,I'm not so familiar with ideas of investing in another state and second because l believe melbourne would be safe in case of GFC or something similar. Not so sure about country towns.
Also wouldn't like to play with SMSF, which leads me to take time and think about your second option. Sounds reasonable.

 

Just like you are going to need to use equity even though you preferred not to, its equally true that you will very likely not be able to achieve what you say you want to achieve if you wont look outside Melbourne. Melbourne is a wonderful city but what I have outlined above requires particular yields to be effective. Yields you cant achieve through conventional single properties in Melbourne ( or anywhere else) - not houses, not apartments, not townhouses and not villas. . These yields can only be achieved using commercial property or resi cash cows such as dual income properties or NRAS. NRAS is essentially finished ( I have a few bits n bobs available) so that really leaves commercial or it leaves dual income ( house + granny flat) as your only real options for those sorts of returns/yields . Commercial is well outside your lane by the sound of things, leaving resi. And here's where the rubber hits the road....you simply aren't allowed to do house + granny flat dual occ in Melbourne - or anywhere in Victoria for that matter. Unfortunately, Dependent Person Units are the only way you are allowed to do granny flats - and they are only allowed under very strict criteria and you cant rent them out . So Melbourne wont cut it Im afraid.

I'm not trying to deflate your bubble. I'm trying to be helpful. What I have outlined above in detail - a detailed dividend reinvestment plan using a cash cow- demonstrates precisely what will get you there. It's the Sellys strategy - ie it just works. Im sorry to tell you, but what you are suggesting ie Melbourne only - will very likely not get you even close.

Now its not completely impossible of course, but here's what you need to happen in order for a Melbourne only approach to work... you will need to strike gold with capital growth . And I mean big gold. Huge gold. And considering Melbourne has had its run and is now petering out - just like Sydney - pursuing a strategy reliant solely on a big pot of capital growth waiting for you at the end of the APRA rainbow is ( in my opinion at least) almost certainly doomed to fail.... The changes to borrowing capacity are just too significant for that sort of growth trajectory to return to cities with such high median prices.

But lets say you can defy the odds and get that huge growth...it would need to be @ $1.25 Million or more.... but that wont get you the income you want. So you'd then need to sell, pay the CGT , take the $1 Million or so of net profit and reinvest it in something producing 5% - 6% in order to generate 50K-60K. That would work easily enough...5% - 6% is certainly readily achievable, no problems there. Question is... is the 1.25 Million of capital growth readily achievable in Melbourne in the post APRA era? And, will you be able to protect your capital? That 1 Million can shrink overnight if there's a bad day at the office for someone on Wall Street

For mine... its comes down to this

Dual income dividend reinvestment delivers the income you want in less than 20 years even in the event of zero growth , can run P&I from day 1 and is zero burden on your pocket

Melbourne resi will eat up all your spare cash just keeping up with the minimum P&I repayments - you'll barely make any extra inroads into the debt - all your cash will just be spent on holding onto the thing ... and after all of that you'll also need to have kicked the $1Million + goal..... in an ever tightening credit environment.

One gets you there even with no growth. The other relies entirely on big growth .
Its completely your call, but you may need to seriously reconsider leaving your comfort zone if you want to get the outcome you have stated you want.

 

Do you think that it' realistic for someone like this person.If as they say they have a regular job to still achieve what yourself and others have in the past 10 year in today' property climate,as getting finance is alot harder especially for average wage earners?.

 

I do think it is realistic, yes. But for this person? In light of their conservative approach to investing, that has come out in their posts since my original reply, no.

When I started accumulating property and building my portfolio some 18+ years ago (and others on here have done by far and away, way more than me), I had a regular job too (and 5 kids to support).

Getting finance may be harder now but paying 10-11% for it when I was buying in some years was hard too. One year I went backwards by $100K just borrowing to hold my portfolio. That was hard as an average wage earner too.

 

Why not?
I don't know how but there must
be way -that's why I'm here on this forum.

Maybe someone smarter will show me the way. Maybe I will get clearer picture.
I'm open for all suggestions and l believe it is possible.

If we did it with two below average wages it should be even more possible soon when my wife gets promotion.

What climate? Bad day at Wall Street?

I don't believe in that. I believe in Australia.
This is Melbourne, officially the best city on planet Earth!
And it will remain in top 10 in next decades.

Migrants are not good for traffic but they are much needed for economy and business owners in Senate will keep bringing them because with migrants they can keep building more shopping malls, selling more electricity, building more walls, making more bricks, selling more toys, chewing gums, cars and whatever you can imagine. All for money.
And most important- more taxpayers!
So this city will grow. And property prices,too.
Like it or not. As long as the most of this country or even planet see it desirable.
And this is place to be and always will be.

Yes, it did cost us 'only' 280k 10 years ago, now it is harder but this is still Australia and with good planning l believe everything is achievable.
So my question is "how " not "is it possible ".

 

That's a great attitude! You're halfway there.

 

1. Completely change your investment mindset. 2, Need to gain real estate investing knowledge. Imo that's greatly holding you back.

 

Thanks for the reply.appreciated.

 

Hi mate.
I was nt suggesting you cant' achieve it ,I was just asking the question whether it' realistically possible these days as borrowing has become alot harder and property prices have stagnated in many areas.many people seem to suggest that you need to be a high income earner to be able to do it these days but I understand there are many different ways of doing things.Either way, best of luck on your journey
Hope it works out for you.

 

Hi @euro73 , I can see you are very good at and love numbers. My question is how your dual occ property only requires $4k expenses? Using your number of gross rent of $34k per annum, I would assume PM fee is about 6.6% min which is $2,244 pa. Council rate let say $1,800-$2,000. Water charges $800 per annum min. Letting/re-letting fee is about 1-2 weeks rent which let say $1000 in avarage. Building and landlord insurance $1000 or even more since there are two buildings/rental contract. So minimum $7k in expenses, not $4k. Other fees such as sundries for PM, maintainance cost, vacant loss have even not been considered here.

 

And the mortgage repayment for $580k at 4.2% interest rate P&I over 30 years term is $34k pa. So if someone want P&I from day one with your dual occ, they will need to pay $7k or more out of pocket per year. If they go IO for 5 years at let say 4.7% interest, their annual repayment will be $27k during the IO term and $40k after that (assuming rate do not change). So at best the dual occ will be neutral geared during the IO term. Of course it will be positive cash flow after taking into account depreciation. But this will decrease over time and you need to pay back upon selling.
So my conclusion is your dual occ is no doubt a good product for some but it is not the best solution nor the only solution nor bullet proof as it is being advertised here.

 

Geez, we love debt on this forum lol!!

For ANY financial plan to work you have to stick to it, to stick to it you have to be comfortable with it and be able to sleep at night.

Have you considered other asset classes mate?
As stated previously, super/salary sacrifice etc might be a good option to depending on your age etc.

I'll be honest mate, even though your home/mortgage was 'only' 280,000 the fact that you've paid it off and had the discipline to set a goal and hit it speaks volumes. I've always been a strong believer in "it's not how much you make, it's how you use it" so in my opinion you will be in good stead moving forward.

For what it's worth a person I know, Far from a high income earner, very very conservative, would only buy property once he had paid off previous property and saved deposit/had lvr he was comfortable with managed to amass an (net) 8 figure portfolio. My whole life I'd say things to him that were hurtful and ridicule him as I hated the fact that he would live so frugally, I.e kept same car for decades, would never by flash clothes or go for breakfast, lunches, dinners etc with friends and would literally count dollars and cents. As I got older, I understood and appreciated the fact that whilst we strive to meet at the same destination we will all have a different journey. Moto of the story, whilst everyone would tell him he was doing things wrong and instead of saving big deposit for one use that deposit for 3 or 4 houses, he stayed the course, he knew how he wanted to get there and did not for a second deviate.

Work out how you want to reach your 50k p.a and use that same dedication and discipline that you did to pay off your ppor towards this and I have no doubt you will reach your goal!

For me personally/my opinion, shares are a better vehicle to achieve a passive net income.

All the best on YOUR journey.

 

Highly, highly unlikely.

 

Very,very true.

I know he took it out a loan to develop a site in 2016 @ around 40% lvr, then paid it out completely with his super etc. Dont know exact figures as unless properties are sold you don't know their true worth exactly but I'd estimate portfolio at 10mil. Whether you believe it or not wont change the way I sleep mate. I really didn't think it was attainable but that's what 44 years of working super hard, being extremely discipline and compounding does I guess.
Helps when his Mrs worked and contributed up untill they had children and part time after children had grown abit older, he bought homes in the 80's for like 80k and he told me the most expensive was 140k in the 90's. Admittably he did work overtime, weekends but his 9-5 was not a high paying job.

 

Not saying you're making it up, just saying it doesn't make sense. On a low income, buy 1 by 1, pay off then buy again. To amass a NET portfolio of 10mil..without any leverage this way.. Quite likely impossible. Unless he has other asset classes he invested in which did extremely well. From property alone? Too unlikely. If they had high incomes then a lot more possible.