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What would you do?

Discussion in 'General Property Chat' started by johnpendlebury, 20th Dec, 2015.

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  1. johnpendlebury

    johnpendlebury Well-Known Member

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    Sorry about another "what would you do if you were me" type thread, but I really would love the opinion of the forum.

    I have been a long time lurker (occasional poster) on the SS forum since 2007 and have recently come across to this site.

    I paid a lot of money to see a Financial Advisor from a large investment bank and I have been left feeling somewhat disillusioned with their advice, or lack thereof.


    Firstly, our current situation:

    I'm 34 and my wife is 30. We currently don't have children but will be (hopefully) in the next 12-18 months.

    Savings: 750k

    Mortgage on PPOR: 520k
    PPOR value: 680-720k

    Other assets:
    Shares: 650k (escrowed so can't sell these for a long time, but received about 30k/yr in dividends currently, with franking credits)

    Debts:
    car lease: 35k


    Current household income: 320k/yr

    Household income in 2017: 600k-700k/yr (depending on how much time wife takes off after having baby

    Household income in about 5-7yrs: approx 1.0-1.5 million/yr (once wife also completes specialist training)

    Goals:
    -live a happy, healthy life

    -enjoy life. our goal is not necessarily to grow our wealth to the maximum level it could possibly be, whilst we aim to do well financially, we would like to go on 1-2 family holidays a year and occasionally splurge on what most would consider a financially irresponsible purchase (car etc)

    -build a well diversified portfolio. residential property, commercial property, equities, bonds.

    -for now we are happy to accumulate assets with the goal of capital growth, but ultimately in 10-15yrs would like to be able to have the option of working less and have a good income stream which we can rely on. to be honest though, its unlikely that we would reduce our workload by that time, in reality its prob about 20yrs before we would consider going part time etc.

    -in terms of a goal of what we would like our income stream from our investments to be by the time we are ready to wind back, I'm not entirely sure, i would think something in the 250-350k/yr mark would be nice, in reality it prob won't require anywhere near that, but id rather aim for more than we might need

    -whilst i wouldnt consider myself overly risk averse, i would like to invest in what one might consider "blue chip" properties. i am after strong capital growth but ideally we would want the properties to be cost neutral or very close to it. perhaps we put a certain amount of our own money into each IP and then allowing the rental income to cover the rest of the mortgage. Having these properties "take care of themselves" appeals to me. Whilst i understand the tax benefits from negative gearing etc, for me, not running a loss each year on the portfolio will help us maintain cash flow to purchase other properties and also do other lifestyle related things with our income. For example, buying an inner city Melb property for 800k, putting 200k of our own money in and letting the mortgage take care of the rest (i made those numbers up so forgive me if they're wildly unrealistic)


    That is what we are keen on, but I'm obviously open to all suggestions/advice.


    We are currently living in a 2 bedroom house which is currently unsuitable for our needs. Our original plan was to sell it, but I'm now thinking perhaps we should keep it and rent it out. Perhaps then just rent another property that does suit our needs/wants rather than sinking all of our savings and taking a large mortgage to buy our family home before we even have a family (currently its just me and my wife). We were close to buying an expensive (approx 2mill) PPOR but didn't win the auction. I'm now considering changing course and instead of sinking our money into a nice PPOR, using that money to help build for a nice future.

    I mentioned previously that I had seen a financial planner last yr. we coughed up a sizeable sum of money to have their advice for a year, it would also include all asset allocation fees. The problem I have is that i don't think their advice was necessarily in our best interest. At the time we were looking for a PPOR to live, they advised that i should put my savings into "safe blue chips stocks that pay a dividend", i asked an example of such a thing and he said BHP. this was about 6 months ago, thankfully i ignored his advice. i told him my view was that putting money into the stock market for potentially such a short period of time was dangerous and that i didn't think any stock was "safe". I never once got any recommendation to consider an IP and i never got advised that it might be better to put my money into a high interest savings account rather than our current standard offset account (currently there is 200k sitting in the offset account which exceeds the mortgage). i understand this doesn't necessarily suit their interests. so i won't be proceeding with their services moving forward.

    Thanks in advance for your help/advice/opinions etc.
     
    Last edited: 20th Dec, 2015
  2. MsAli

    MsAli Well-Known Member Premium Member

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    Hi @johnpendlebury

    You have a lot of clarity around what you want and that beats majority of the population! And congrats on being able to recognise they didn't have your best interests at heart in time!

    From what you've posted, appears you would be well placed to build a multi million portfolio fairly fast, of course keeping in mind the recent APRA changes that limit how much people are being able to borrow. Though the high income, savings and a decent equity position should significantly help you leap frog compared to someone who doesn't have the same income & savings...

    Any idea where you would purchase? Any thoughts about what your strategy should be (apart from blue chip)? What sort of cashflow are you able to sustain - given blue chip properties are more likely to be negative cashflow than not?

    To add, $250k per annum would require roughly $6m of real estate paid off (including the property maintenance costs, council rates, water rates etc).

    I would look at the big picture (where you want to get to) and your affordability and work back to map out how you can get there.

    Cheers,
    MsAli
     
    Last edited: 20th Dec, 2015
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  3. euro73

    euro73 Well-Known Member Business Member

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    1. Take 520K or the 750K cash, and pay off your PPOR in full. Leave the other 230K as cash to be used as 20% deposit+ stamp duty for your future PPOR
    2. Draw out 560K - 80% of the value of your home for INV purposes.
    3. Use the 560K to fund 12% deposit + stamp duty + cash buffer to purchase 8 X NRAS properties with an average value of @ 400K each
    4. The NRAS properties will each produce @ 20K of deductible losses ( 10K from pre tax cash loss, 10K from depreciation) , which equates to a total of 160K in deductions . This will be very useful in helping you reduce your taxable income significantly.
    5. The NRAS properties will also produce tax free CF+ surpluses of 10K each for the next ten years, especially given your top tier marginal tax rates, which will equate to an additional 80K of tax free income per annum. This extra tax free cash flow , when added to your minimum monthly repayments will have you paying off the 800K mortgage on your new inner Melbourne PPOR in less than 6 years

    So 6 years from now, you'd have your existing PPOR as an INV property, and carrying 520K of debt, you'd own your PPOR outright with zero debt, you'd have 8 other CF+ investment properties and you would have also been able to add significantly to your other assets ( shares, super etc) because you'll have incomes that allow you to save /invest tens of thousands per month, separate to what I have outlined above. After 6 years, you could then focus on paying down all of the INV property debt, leaving you with an unencumbered PPOR, and 9 unencumbered INV properties within 10-12 years. Those INV properties would easily deliver you the 250-300K of passive income within 10-12 years. And that's without taking your dividends, super or any future investments into consideration.

    Let me put it another way. Think of an NRAS property as a share - if you invest 70K towards a 400K NRAS purchase - to cover 12% deposit, stamp duty + cash buffer, and that property returns you a fully franked dividend of 10K tax free, thats a 14.3% tax free ROE. If you then reinvest that towards paying down your new 800K PPOR debt, you get a compounding tax free return, as all profits from the sale of that asset in future are tax free. But you also get a property asset with this strategy....so my firm view is that this is the best investment opportunity available today, especially for higher income earners. It is an almost fool proof path to a multuple 6 figure passive income for life, without any of the volatility of the sharemarket .
     
  4. johnpendlebury

    johnpendlebury Well-Known Member

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    Thank you so much for your replies.

    euro72: may I ask what a NRAS property is? a quick google search tells me it's a "National Rental Affordability Scheme" property. What is this and what are the main advantages of purchasing such properties?
     
  5. johnpendlebury

    johnpendlebury Well-Known Member

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    From the DSS website:

    Can small-scale or private investors participate in the Scheme?
    As NRAS aims to encourage medium to large-scale investment in affordable housing (generally more than 100 dwellings), it is not generally available to small-scale, private, individual investors in the rental property market who may own or build a small number of properties. Individual investors could become involved by investing in entities that participate directly in the Scheme, for example, through a superannuation fund or property trust, through a consortium arrangement, or may, under some circumstances, purchase a dwelling which is subject to an allocation of an NRAS incentive.
     
  6. Tim & Chrissy

    Tim & Chrissy Well-Known Member

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    Congratulations on your financial achievements so far, you're doing exceptionally well and you should be proud of what you have achieved to date.

    I can't offer much in the way of financial advise however I think you've got that largely figured out.

    I'm guessing you and your wife work long hours to have the sort of success you've had?

    I think you need to take a step back for a minute and think about what you really want in life. You want to have a child in 12-18 months but nothing in your plan, apart from family holidays, indicates how much time you will have to invest in your child/ren and you only talk about winding back in 15 years, your first child will be 13-14 by that point.

    My wife and I are similar ages, we have 4 children and have a household PAYG income of just over $100k per annum (my wife has just started a new business so we almost exclusively rely on my wage). I work 4 x 10 hour shifts per week and have a 3 day weekend every week to spend with the kids.

    My suggestion would be to tweak your financial goals, maybe be a little less ambitious with them, wind back your income goals and add in a few family oriented bench marks so you can achieve that first goal: 'live a happy, healthy life.'

    I always tell people to ask themselves this question:
    How many people on their death bed will say 'I wish I had of worked more and spent less time with my children'
     
    Last edited: 20th Dec, 2015
  7. sanj

    sanj Well-Known Member

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    #longpostalert

    congrats on an outstanding result so far.

    To me personally one of the key things you mentioned is this:

    you are in a highly unusual position where your household income is extremely high, is scheduled to grow even more from here, there are 2 of you working (or potentially working) which reduces the reliance on a single source of income, you've got very high servicability AND a good asset position. Basically, you're all set.

    With your goals in mind and everything i mentioned in the paragraph above, i honestly would not waste my time with resi properties if i was in your shoes. The NRAS angle is an interesting one and could perhaps be considered, although id avoid buying 8 at one go as @euro73 suggested, eggs in 1 basket and all that.

    Apart from the possibility of NRAS i really wouldnt bother with resi properties, blue chip or not.

    The vast majority invest in resi property and start there (myself included) because it is the easiest form of property investment to get involved in both financially and from an understanding POV. Many then spend years building up their cash reserves so they can invest in a high income producing less headache commercial property.

    You have the ability to look at that now, there's no need to play in the kiddy pool. It's the equivalent of having a business class ticket and waiting in the economy line to check in, you need to recognise the great opportunities that you can explore due to your financial situation. If your goal is to replace part of what is a very high salary, resi properties are unlikely to be it, especially if the 2 of you are flat out with work and dont want headaches.

    eg a $2m commercial IP rented at 7.5% to a strong tenant on a decent lease would be 60-70%LVR. If 60% then you need 800k +stamps, if 70% you need 600k+stamps. Id also recommend a buffer of usually 1 year after the bank guarantee ends but with your incomes as strong as they are you could do 6 months.

    from this one property alone you would get 150k in rent and pay 75-80k in mortgage based on paying somewhere in the 5s % wise.

    you would have created 70k in passive income immediately with no need for waiting for rents to rise, hoping for capital growth, dealing with a dozen different properties etc. you only need 3 of them to reach your retirement goal and with your projected income gains in the future you can do it easily.

    in the meantime, definitely do not make the silly mistake so many do by buying that big $2m house, it will set you back years in terms of lost capital and servicability. go out and rent an amazing property instead, i'd imagine 1-2k a week would get you something pretty nice in adelaide. absolutely nothing wrong in treating yourselves along the way, just do it smartly so that you keep your capital for things that will help get you to your goal.
     
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  8. johnpendlebury

    johnpendlebury Well-Known Member

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    @Tim & Chrissy Thanks for your reply mate. Yeh, i do agree with you. As you said, we are in a fortunate situation to be where we are. We have a nice platform to launch from and I just want to make sure we capitalise. As i said in my original post, i certainly am not worried about 100% maximising our returns, i.e., we could no doubt achieve higher financial goals if we focussed 100% on investing and everything revolved around that aspect of our life, but, that's not what i want to do. If my wife wants to take an additional 6 months off work to stay at home with kids after they're born, i want her to have the freedom to do that. I certainly don't want to feel trapped where we have to pick up extra work etc to service the various loans we have going etc.
     
    Last edited by a moderator: 4th Nov, 2016
  9. sanj

    sanj Well-Known Member

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    agreed and this is one of the reasons i suggested an income producing commercial property. this will help with your wife taking time off instead of you having the double whammy of her income not coming in plus having to pay for negatively geared properties. when she's ready to go back to work, be it a year or 2 or whatever she can, if you have your income plus some passive income from the commercial IP and your dividends (not sure how steady/reliable they are) then having her not work is not going to affect your lifestyle at all or add pressure financially.
     
    Last edited by a moderator: 4th Nov, 2016
  10. johnpendlebury

    johnpendlebury Well-Known Member

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    Thanks a lot for taking the time to write that reply. I was hoping you'd contribute your 2c :)

    -We def don't want the headaches of having to manage the investments. I was under the impression you can just get a property manager that will deal with the tenants etc?

    -I was looking at the commercial property sub-forum the other day. It seems quite foreign to me. But what you say sounds very appealing. I'll look into that. You would really avoid resi property?

    -the lure of buying our dream home was strong, but i recognise that doing so severely limits what we can do from an investment point of view as your cash flow is largely destroyed by paying down the mortgage

    -would not need 1500/week to get a nice rental for us in adelaide. 800-1000/week will get us something we'd be quite happy with.
     
  11. johnpendlebury

    johnpendlebury Well-Known Member

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    I understand rental returns from Commercial property is excellent, do you still get good capital growth as well? Obviously depends on where you buy and the type of property etc, but generally speaking do values go up in a similar way that resi property does?

    I have a bit of an issues of investing PURELY for yield. this relates mainly to the stock market but i guess the same principle would apply to property. don't want to risk capital by chasing yield.
     
  12. sanj

    sanj Well-Known Member

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    commercial property can often grow in capital at slower rates than resi but not always, i dont think you would necessarily be risking capital, especially if youre buying decent quality assets.

    this would not be purely for yield as you will see some capital growth (although more yield than capital growth imo) but even if that's the case, you have to ask yourself if that's an issue. you cant replace yours or your wifes income with capital, money hitting the bank every month from multiple properties making 5-10k per month each certainly could. even if you got 3-4% yearly increases, with that compounding before long your initial purchase will see you receiving 200k in rent instead of the initial 150k, all of a sudden, assuming you havent paid any of the loan off (in your situation i probably would pay a bit down), you are cashflow positive by 125k or so. From 1 single property, within around 5 or 6 years.

    in the meantime, you have collected just under 600k in net rent in those 6 years, plus youre making over $1m a year from your businesses and likely wouldve been in the position to buy again after say year 4 or 5, depending on when you reach a comfortable buffer.

    To me it's the simplest way to achieve your goal and not all that complicated, yes it is more work initially than just buying a house, perhaps pay someone who is highly skilled in that field for some of their time. once the initial work is done though there isnt much to do and you only need to look for something to buy every 4 or 5 years or whatever. the rest of the time can be devoted to your family and work.

    no idiot property managers trying to get idiot tenants to behave themselves, all while hardly putting a cent in your pocket. no brainer imo.
     
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  13. euro73

    euro73 Well-Known Member Business Member

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    You are correct. NRAS is the National Rental Affordability Scheme. You accept 20% less rent and receive a tax free credit in return. The tax free credit is currently worth $10,917 per NRAS property, and increases in line with rental CPI on May 1 each year. And it's 100% tax free.

    The benefits are ... superior tax deductibility due to the reduced rental income generated by the property, coupled with superior tax free cash flow generated by the negative gearing + the NRAS tax free credit. This adds up to very strong after tax surpluses.

    The strong cash flow means that aside from the equity you deploy to fund the seed costs ( deposit, stamp duty etc) the portfolio costs you zero to hold. That buys you the ability to build a portfolio without creating any stress on a budget, so you can spend every spare dollar ( and the surpluses you receive each year) on aggressive non deductible debt reduction.

    In a nutshell, the properties produce excellent tax write offs and excellent after tax surpluses , simultaneously, for 10 years. After 10 years the properties cease to be eligible for the NRAS crediyts, and are returned to normal market rent from the 11th year, by which point they will be CF+ under their own steam anyway.

    Having a property portfolio that is both negative geared and cash flow + tax free is getting the best of both worlds. Lets face it, owning any asset class which generates significant tax deductions and significant tax free surpluses is smart investing.
     
  14. johnpendlebury

    johnpendlebury Well-Known Member

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    @sanj hmm, interesting. sounds like a somewhat safer way of achieving some income compared with high yielding shares where loss of capital is always a risk.

    obviously not all or nothing, can go down the commercial property path and still put a bit of money in shares etc.

    i'll head over the commercial property sub-forum to get learning!
     
    Last edited: 20th Dec, 2015
  15. euro73

    euro73 Well-Known Member Business Member

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    It would be difficult to find 8 NRAS dwellings now... the opportunities are almost all gone. But my point was simply...here's what you COULD do ... and of course given the broader position and future incomes you have in the coming years, you could also do commercial properties, shares/equities and any number of other things... you are in a fortunate position where you can have quite a bit of diversification.

    If it were me, 8-10 RESI properties running big tax free surpluses, adding a couple of commercial properties in a few years time, and a nice share portfolio would tick a lot of boxes...
     
  16. Tim & Chrissy

    Tim & Chrissy Well-Known Member

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    I think I need a few of your pearls of wisdom @sanj however @johnpendlebury is on the express train while I'm walking :D

    CF/serviceabilty is my main problem however I wrote off commercial a long time ago due to the risks and not have a solid foundation portfolio yet.
     
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  17. euro73

    euro73 Well-Known Member Business Member

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    You're already off to a handy start... just focus on debt reduction for the next few years to improve your serviceability ... every extra dollar of non deductible debt you can get rid of , will help.
     
    Last edited by a moderator: 4th Nov, 2016
  18. johnpendlebury

    johnpendlebury Well-Known Member

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    Main risk being vacancy?
     
    Last edited by a moderator: 4th Nov, 2016
  19. Tim & Chrissy

    Tim & Chrissy Well-Known Member

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    Yes, one bad buy would either put ne in serious hardship or sink me. However a good buy would allow me to keep investing and release equity faster.

    I came across one about a week too late. $350,000 5 x 5 option taken up after 5 previous successful years and $1,000 per week rent. The only downside was the roof needed replacement in the coming years (about a $100k job). It was under contract at the time I found it. I wouldn't have been in a position to buy regardless, I have a good amount of equity but getting preapproval is killing me, onto broker number 4 now who looks promising, she has run my figures and can get me a residential loan to buy something up to $600k.
     
  20. euro73

    euro73 Well-Known Member Business Member

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    They need to run your numbers at Liberty and at Pepper - if it doesnt work there..... it's going to be hard going. But whatever you buy, sounds like this next one will be your last for quite some time until your income increases quite a bit, or you deleverage quite a bit - you could do with some serious Cash Flow to aid things.
     
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