Working out How Many Properties are Needed to Reach you Goal

Thats what I mean, if you're old enough to access super you're also close to all earnings being tax free. that 500k left in super would mean no income tax or CGT paid on it at all. take it out of super and now you're paying income tax on the earnings. even if you're paying 30% tax and earning say 5% yield, that 500k means tax of $8333 per year on income of 25k. so you're throwing $8333 in the bin every year, more as time goes on. plus the opportunity
cost of not having that
t
$500k in super making tax free gains or income

 

How would you use the $500k instead? Progressively draw down for living expenses?

 

you'd use it however you see fit, working out what to do with 500k in a tax free environment is what they call a good problem.

 

Just to confirm I've got my head around it:

* If you paid the $500k into your property portfolio and as a result generated an additional $25k income p.a. you would pay tax on that $25k
* If you left in it super and drew it down at the rate of $25k p.a. you pay no tax (and just continue to carry the additional $500k debt which then offsets some of the income from the total $2.5mil portfolio)

 

to illustrate what Im talking about, let's look at the 2 different scenarios here, one being 500k in resi investments yielding 4%, outside super, aa part of an overall portfolio earning 100k income pre tax. the second option is that same 500k in super for someone in pension phase, earning say 7% from commercial property or flanked dividends or whatever.

option 1 resi property outside super

500k yielding 4% net = 20k/year.
taxed at 38%, assuming 100k income = $12400 after tax

option 2 - higher yield within super

500k getting 7% = $35k.
if youre in pension phase that entire 35k is untaxed.

Basically, the same 500k can give you a net return 300% of what is being proposed just by A) leaving it in super and B) not accepting 4% net as an acceptable yield when income is what is being chased to retire on.

the difference is staggering for someone who is close enough in age to seriously consider the benefits.

 

Why would you draw it down from super? why not invest that 500k and benefit from the tax free earnings?

 

Correct me @Terry_w @sanj if wrong as not really familiar with Super.

• Instead of paying down PPoR, salary sacrifice to super.
• You immediately reduce your tax rate to 15% (assuming a marginal rate of 30%) getting a differential of about 7% per year if paying the mortgage @ 8% over the life of mortgage.
• So even assuming a term deposit rate of 3% in super, you are 10% better off than repaying the PPoR.
  
• Pay of the PPoR when you have tax free access to the super.
  
• So basically you have converted the non-deductable to deductable using super.

 

I understand your point now. I was thinking about it more from the perspective of LOR, no more investing, not worrying about returns, just reaping the benefits. I'll re-read this post in 30 or so years to remind me to keep the money in super!

 

You would be LOR as well, except within super instead of outside.

it's pretty simple, super is just a structure, what you do within that structure depends on you and your risk profile.even if you do decide all you want is paid of resi property earning 4% net, that same 500k within super buying an identical property to what you own outside super will put more in your pocket due to leas/no tax depending on your age.

there's always the temptation to ignore it, especially for us younger investors but ultimately that's a bit silly imo because that's valuable capital being wast
ed. those a bit older who don't pay attention to it at all are pretty negligent imo, if I was in my 50s I'd be setting up my smsf, freeing up cash by selling or borrowing against assets and maximising my non concessional contributions. atm you can effectively put in $720k in a few days if you do 180k in end June for thst year and 540k in July for the following 3 years. I find it amazing so many people don't at least consider it

 

I've been thinking about it more lately, would like to salary sacrifice but our serviceability is maxed so can't do it. Instead we are considering moving our investment choice to the higher risk option to chase the higher returns.

 

I did a similar calculation when i started 6months ago.
It came with - i need to have 5 fully paid properties with net rental income of $400/week each.
To get there in 10years, i need to turn around 40 properties, considering mostly worst case scenarios.
- I needed to buy 4 properties every year and hold for first 4-5years before starting to sell them, which looks unrealistic in today's world.
- Either I need to increase my income or increase the timing of my goal achievement.
- or i need to take small CGs and sell one each year.

 

- or you need to not base your retirement around accepting 4% returns.


come on people, this is meant to be a forum where we're all trying to achieve well above the average, how can the end goal be 4% returns on our capital after decades of dedication and honing our skills?

you'd even put money into high yielding shares paying fully franked dividends before settling for that, it would mean reaching your goal significantly quicker. instead of needing say 2.5m worth of paid off properties to get 100k in income you could get there with maybe 1.5 or 1.8m worth. assuming 5 years for each property you're talking about saving 10 whole years from the timeline

even if someone felt resi buy and holds targeting CG did best suit them to build equity/capital (and I completely agree that for some people it does), you could stop earlier and put the equity gained into something higher yielding. that's an entire say 10 years extra of freedom. freedom from having to go to work that you may or may not enjoy, freedom to spend more time with your family, kids or on your passions, all by not accepting such a low figure as the end goal.

I know I've been banging on about this a fair bit and am probably irritating a few people, I apologise if that's the case. I just get frustrated because there genuinely can be other and quicker ways to get there, even assuming lower risk passive strategies are what's appealing to the investor.

I haven't even touched on other higher risk/higher reward stuff because it's comparing apples and oranges

 

These are the effects of yields for generating the same $100,000 pa income:
4% = $2,500,000 in assets needed
5%= $2,000,000
6% = $1,666,666
7% = $1,428,574
8% = $1,250,000

Doubling your yield may result in half the capital needed. Getting to desired income at 8% take much less than half the time of 4%.

 

I don't mind you banging on it, though it is a property forum and there is a certain mind set and that is basically to continue accumulating property, increasing debt, with no clear strategy in place to increase yields, create income streams.

This thread is great and its a reality check.

MTR

 

I want to hear more!! Keep going! 4% is boring! I see property as leveraging and creating equity to help finance bigger things... Just need to work on what that will be

I realise I need to push super up the
List a bit, get it working harder. Plus keep working on my inventions!! Mrs said she'll leave me if I don't come up with something!
Now.. Does anyone know anything about patents and registering designs lol it's all about learning isn't it

 

I understand your point of view.
However as i mentioned i considered worst case scenarios in my calculations. Even though you plan for a bigger and better goal, you still need to plan certain scenarios. And if you work on the worst case, you end up going relatively higher when best case happens.
So if we work harder & aim for a 4% yield on 2.5mil and end up earning 8% I don't think you doing anything wrong.
Instead it'll be incorrect to aim 8% and accumulate only 1.2mil but end up with 4% in case things go pear shape in economy.
Thoughts? ?

 

But hang on, 4% return may even be high, let's say you bought something for 200k years ago that is now worth a million or two, rents have gone up, but the return % wise is very poor, but the asset is appreciating.

4% would be no good where CG is going to be very poor.

That is different to buying with 4% at the outset, what do you look for Sanj ?

 

quite similar to what we've planned.However we are looking at the other way around knowing 7 properties fully paid off with $350 weekly rent and deducting Maint costs. We'r looking at the ~70K income post tax from Property investments. Rest of the 20K-30K post tax income will be funded from dividend income. We are assuming 30% tax.

any gaps (before super age) will be funded by some contracting/part work, We both can't see ourselves stop working for long but at least we'll have a choice. Once we reach the super age, any gaps from above will be funded by super income.

This is something we are not sure about...Above figures are in today's dollars. so should we bump up our goal by inflation X number of Yrs away from retirement or assume that rent/dividend/CG will increase with inflation. How do others cater this in their plan.

 

@sanj can you elaborate more on these high risks stuff....

 

Mmm I too am a bit confused by this. I think it's the % return on the loan taken out on the property not its future value...