Working out How Many Properties are Needed to Reach you Goal

I have a friend working a low end job but has a patent. Anybody want to employ him in an analytic or research type role in Sydney? He'll be a good asset to your company...

 

For those of us who are young enough to have a chance at a decent amount of super when we retire, one option is to set a goal of x income per annum to be funded partly by super, partly by property and partly by dividend paying shares (or other equities or managed funds). This is my approach, with the risk of being a 'jack of all trades and master of none'.

The other component is small scale development to boost income. I am currently building a townhouse at the back of one of my investment properties which will boost my income by ~$500 pw. There is room for an additional townhouse on that block also, so a property that was generating $400 pw will be generating in excess of $1,400 pw in the future.

If I do the same thing twice, that would basically replace my salary. And I would have 30 years to pay off the loans

 

Once you move into the pension phase the government requires you to draw out a certain percentage of the value of your super every year. That is why you would draw the funds out of super. The minimum amounts are horrendous. After 85, it's 9%. After 90, it's 11%. I have to take this into account since my parents are nearing 80 and my grandparents lived into their 90s.

In your scenario of a SMSF with a CIP, it's going to be difficult to draw out 11% of the value of the fund in cash per annum. This is something people will need to plan for.

I agree though that properly planned, Super is going to give most people a much better effective return than having a resi rental property or 2.

 

Don't forget you can still contribute back into super under to about 75 - under certain circumstances.

 

Good post. Most strategies are speculative , thinking in ten years they will double.

 

Hah. I was just aiming to have 5 or 6 properties at about 180-250ish a week. I have low standards

Maybe I'll marry a rich guy before I retire. Stranger things have happened.

 

Like what?

 

Good point. I'm horribly anti-commitment, I'm going to stay one of those single people with cats. But more houses than cats. Really.

 

@JZ93

I am not taking about future value, I am saying if you bought something at 200k and is now worth say 1.2 mill, rent goes up, but the return is dropping really, if you pull out the money and re invest on multiple places with a real 6% return......

let's use this example.

1996 you bought for 220k

2016 is worth 1.2 mil rent is still only 650/week... that is less than 3% sell up & for arguments sakes, pay out the 200k loan.

Go buy 3 330k houses returning 6% or just say 380/week each you now get a rent of 1140


So yes, you initially look at it using the total buy cost (not just the loan).

But later, you should also look at it in terms of what it is worth if sold and what return your getting.


Or ask yourself this...

If you went to sell your 1.2 mil place, how will the investor looking at it do his calcs ???

 

correct me if i am wrong, if you take option 2 and buy shares where the fund is in a pension phase, with those shares paying fully franked divs, then the returns are even better as you get refunded the franking credit. ie your return in the fund on 500k is just under 50k on 7% yielding shares..ie 10% after tax

shares yielding 6% is probably more realistic though, which would come in at 42k a year after tax..still a good 8.5% net yield

again, correct me if i am wrong but if your over 60 your pension/income stream is tax free, under 60 though and you may have to pay tax on the taxable component, at marginal rate minus offset...so that can reduce the individuals yield in the hand a bit

 

I have zero knowledge of Super but this thread has inspired me to investigate and consider my options for now, and for the future (I'm 34 currently).

But the one thing that scares me about Super is this: Can't the Government just change the rules/goalposts for Super any damn time they want?

I'm not just talking about changing the age-of-access rules, but more importantly, taxation too. I understand that present political parties are pursuing these tax change ideas to plump up the public purse/coffers. Nothing ****** me off more than the Gov greedily taking more tax out of my hard earned/saved super, to fund more welfare bludgers etc.

But isnt this a substantial risk with Super tax policy? And unlike things like neg gearing tax adjustments, Super tax adjustments seem unlikely to be grandfathered in, but rather blanketed in across everyone at the same time, no?

I get it; Super as it stands right now is a lovely tax haven and has great benefits, but what if that structure were to suddenly change? How would this effect forumites' outcomes if Super was a big part of your overall plan?

 

Yes the rules can change and the only certainty is that the super laws will change.

 

What no one is accounting for is the changed credit environment. Young / new investors reading this need to be realistic. Really, brutally, cold-heartedly, clinically realistic. If those of you starting out and wanting to get to a 6 figure passive income, really believe that you can emulate the successes of older or more experienced investors here by using strategies that worked for them during an expansionary credit environment, you are being poorly poorly advised. Yes, until last years regulatory intervention, emulating their successes may have been possible, but it is no longer possible.

By that, I mean that old school approaches of buying, harvesting equity and then using that equity to purchase again, then repeating, then repeating, are no longer viable for the majority. The game has completely changed since APRA and ASIC changed the way investment lending and affordability assessment is now calculated. If you are serious about having the borrowing capacity necessary to grow a large enough portfolio to achieve financial freedom, you need to understand debt reduction is critical. Ask any broker here...

The only exception to this will be for those on very ,very high incomes who do not encounter servicing ceilings, but as that is unlikely to apply to the majority on here seeking advice on how to get themselves set up for life, here are some strategies for the majority who will face serious borrowing impediments throughout their journey, to give serious serious consideration to.

First - buy several cheap and cheerful NRAS - sub 400K. Buy as many as you can currently afford.And do it fast, as the opportunity is almost finished.

Then - reinvest the 8-10K tax free surpluses from each property, in paying down non deductible debt. Start with credit cards, personal loans, then attack the PPOR mortgage. This will have a 2 fold effect over the next few years. It will create equity as you pay down debt, and it will improve borrowing capacity significantly as you pay down debt.

Never mind the naysayers who tell you that NRAS reduces your borrowing capacity. They are mathematically challenged. It is a short term impact and in the end you will end up far better off. Simply put - massive reduction of debt far outweighs a modest reduction in rental income, on lender servicing calculators. Within a few years you will begin to make significant inroads into your non deductible debt, and see tangible improvements to your borrowing capacity which you would have otherwise been waiting years and years to see if you'd followed convention and purchased 4- 5% yielding properties that didn't help you one iota to pay off any non deductible debt. As that happens, look at high yielding dual income properties as the next additions to your portfolio. My recommendation would be to look at regionals, as metro dual occupancies are too expensive and are therefore an inefficient use of borrowing capacity. You can likely purchase 2 very high yielding regional dual occ's for the price of 1 metro dual occ.

The aim of the game is to generate massive cash flows so you can be continually paying down debt ahead of schedule. ...this will facilitate continued equity generation even when growth may be flat, and continued borrowing capacity even when rents and wages may be flat.

That is how, in a post APRA world, you will grow a portfolio that will produce a passive income for you

 

We understand the game has changed due to tight lending. I still think one need to consider, like everything works in cycle and if you are suggesting we are going to be in tight credit cycle for long (even 10 yrs..) i think its big call. Eventually, lending criteria will loosen and strategy you mentioned used by successful investors in past will come in play.....meanwhile renovation, development is also proven strategies...

I agree, current environment demands the change in approach then traditional way. I am not familiar much about the NRAS properties so don't want to comment just on my vague understanding... where are these NRAS properties located (Regional, Metro)....if Metro how far from CBD generally....in your exp what sort of capital growth these properties provide...

personally, i don't mind cash flow coming to my pocket to reduce my loans but quality of assets is much more important as i m in accumulation phase......

.

 

I can't help but notice that you're recommending a product (NRAS), that you seemingly have a vested interest in?

I bought in October last year (post-changes) and nothing seemed unreasonable about the changes to me. Just because previous generations took on a tonne of leverage, gambled and won, doesn't mean new generations should A: spin the wheel and expect the same outcome or B: find other products that let them spin fundamentally the same wheel. If they want to make six figures:

• Find a way to make money to invest
• Invest regularly in solid choices
• Time in the market

Lets assume a 21yo now wants to make $100kpa gross when they retire age 60 before super. at a 5% ROI they need $2m in capital as per Terry_W's post.

Assuming that 5% is the average return they get (which is probably a tad below what the long term average 'strayan market performance has previously been / likely will be over the next 40 ish years.. but its such a long time who really knows) they'll hit that by investing $1,390 a month every month until retirement. That's with nil leverage, nil special tricks, just finding 5% long term performance (e.g. an ETF or ETFs....) and plonking their cash into it every month.

Can't save $1,390 a month? Get a second job, boost your income or write off the goal of having a six figure passive pre-super retirement income

Don't want to have to invest that much every month? Find a way to generate higher returns or use leverage & hopefully it pays off...

Want to retire sooner? see previous + add on SAVE MORE.

"Quick, buy some of the last available NRAS properties I seem really keen on spruiking!" is hardly the only way that young people will achieve this dream if they want it.

 

With leverage the yield is even more important
For example assume you 100pc lever from your current portfolio at 4pc borrowing cost at 4pc its no profit at 8pc it a massive gain

 

Cats are great they can visit the neighbours and come back fully feed !

 

Same. My cat came up to me earlier, meowed for a lap snuggle, and when I said no, he vomited in the corner then left the room. At least tenants don't vomit in my IP's daily.

 

@DaveM - better the corner than your lap

 

It's not so much a big call, as the only call based on the evidence. The changes to sensitised assessment rates and HEM's take @ 40-50K of pre APRA income for servicing away per $1Million in debt., depending on household configuration and income levels. When we are talking about investors needing to build a portfolio large enough to net $2Million or more in order to generate 100K passive income through property, that shouldnt be ignored. That is over 40% of a median Australian households GROSS income, gone as far as bank calculators are concerned. Doesnt affect Owner Occupiers without OFI debt at all... does affect investors with OFI debt, significantly.

So the cycles you refer to should not be relied upon to continue along the same patterns as before. Those cycles were facilitated by an expansionary credit era unlike anything ever seen before. That has now changed. If not forever, then certainly for the medium term as global regulators drive lenders to recapitalise and deleverage. The cycles will change. They will be slower. This is where debt reduction is so valuable, as it will accelerate the return to improved capacity for those who embrace it.

When you argue that these credit policies will "loosen"...how do you believe that might manifest itself? I ask because in order for that to occur, the banks would have to ignore APRA and ASIC. who would in turn have to ignore BASEL's recommendations, and return to assessing debt at "actual" rates, and reduce their assessment of household expenditure.

These are possibilities I suppose. Never say never, after all... but you have to realise that the banks would have to be prepared to set aside billions in additional capital that they'd be penalised for doing so, which would force them into a series of capital raising exercises and rate rises in order to restore return on equity to shareholders... pretty much exactly what we have just seen happen in Australia - and thereby canceling out any material benefits to borrowers, while also placing severe pressure on their share prices....

Why do you think the banks have all gone along with APRA andd ASIC so quickly? They have no choice, is the answer.. it's cheaper to play ball than not play ball. Simple as that. It's either play ball or get absolutely destroyed by the heavy heavy capital provisioning penalties that would follow. When banks travel the country doing roadshows for brokers and they are talking about this being the new norm, you know they know they have to play along....

And that's before we even take global funding costs into account... don't forget that the drivers for this are the BASEL committee recommendations, and if Australian regulators, and in turn Australian lenders were to ignore them, their credit ratings would be downgraded, causing their cost of funds to increase significantly, driving up the actual rates you and I paid... further rendering any changes they make, absolutely ineffective. Never forget that Australian lenders rely very very heavily on securitised funds to lend in Australia. As other nations found out after the GFC when their banks were downgraded, cost of funds and LVR restrictions can get very ugly, very fast when you get downgraded.

This is far far far more intricate and sophisticated than .."oh, the banks will go back to lending like they always did" You have to understand the bigger picture of what is going to occur with regulation globally to ensure banks across the world have sufficient safety nets in place. Once you are across that, you can only conclude the cycles people here are still grasping at, are fantasy, as are hopes of a return to the pre APRA and ASIC days, any time soon... but as I said, its possible this will all go away...never say never....