Strategy for a high income earner?

Hi all,

Another thread paints a sobering picture to achieve 500K passive income via residential property - the contributors detailing a required 12.5 odd million of unencumbered property.

This has further let the wind out of my sails, as I've been struggling to formulate a strategy. I've read all the SS and PC posts, and most of us come from different start points.

So, here's me.

My yearly salary is upwards of 550K+, essentially by working two full-time jobs (single income earner for family of 5). This is largely a windfall salary after many years of not much, and accumulated debt. I should reasonably be able to get 600-800k pa without changing too much from this point. I'd like to replace some of this income, with the view to winding back active time within 10-15 years, but also to accumulate enough significant wealth that ultimately I'm working because I enjoy it, and we can buy the fancy things that we certainly do not buy now (I drive a $2000 car, dress in old clothes, and have holes in my shoes - we have lived on a shoe-string for so long that old habits die hard, and frankly, I do not wish to blow all this disposable income with a lavish lifestyle, until we are set up). I'm 35.

I have a highly leveraged 2M portfolio of 2 IP's (Brisbane and Far North QLD) - close to neutral, and a relatively humble Brisbane PPOR which will become a good IP in a few years.

My strategy was to plod along and accumulate properties, wait for CG then go again, into a different market when Brisbane has hopefully done its predicted thing. The end goal is unclear, but 12.5M unencumbered seems entirely unachievable (mindset? perhaps.)

The current focus is to pay down some accumulated non-deductible debt and accumulate some offset buffers, but this is accelerating and achievable by the end of the year.

I'm contributing to super, have nothing yet in the share market, know nothing about commercial property, and until I lower my LVR (currently high 80s) and increase a cash buffer, am moderately risk averse.

So, how would you invest? Is residential property a waste of time for me? (if i truly thought this I wouldn't be here, but I'm really struggling to see the light).

 

Its all about structuring in a situation like this.

Do you have a spouse? does she/he work?
How much can you save pa? Is your home paid off? etc

 

Stay frugal, save big until you restructure your finances.

You haven't mentioned of you have any strategies in place for tax minimisation eg salary sacrifice etc.

 

@Terry - my wife is not working. She can reasonable receive some income from me as secretarial support, but we have not done this yet.

My PPOR was 105% financed - this is all non-deductible. It was an IP, but we moved in the day after settlement due to a change in heart.

The remainder of the picture is mixed - the brisbane property is 90% my wife's as TIC, the FNQ property is 100% mine.

Im trying to debt recycle, with some refinancing in progress - I should be able to convert this at a rate of 20%+ of my income (I have a fixed 20% of income that needs to be paid back as an expense).

@Scott No Mates - that's the interim plan I salary sacrifice up to the FBT threshold plus super.

 

Really curious what you do for a job with an income like that?

If I was in your shoes. Draw a circle around Melbourne and Sydney cbd's. 3km's out. Buy houses in those areas and just pay them down. Accumulate around 10-20 over 15 years. Sell half at the end. Super low risk strategy and you will make a motza.

 

It's exactly these 'if I were in your shoes' ideas that I am after. Otherwise I am just constrained by my imagination. And mentors are hard to come by! Thanks.

 

Not sure about the viability of paying your wife for secretarial services, but you would want to try to divert income to her. One strategy would be to buy in her name and then park all spare cash in her account - after legal advice.

TIC 90/10 is not a good idea. Seek advice about selling your 10% to wife who borrows to buy it. A bit of debt recycling, but it allows you to get off the loan - in future. She won't have an income for servicing at this stage so you will still need to be on the loan, but in future you may be able to come off as her income increases.

Depending on your cash levels and saving ability you may even buy another in the wife's name and offset this too. Later when you buy a main residence you can use this cash. Wife should have more of an income by that time.

Once you consider how to own then you should consider what and where etc.

You have to consider land tax also.

 

Do you have a PAYG high income job (ie corporate) or are you a director of company(s) which have obviously now become successful....

 

With that level of income, it would make sense to pay for some expert advice. You could turn that into an amazing investment stream very quickly

 

PAYG

 

What do you do for a living?

And is your company hiring?

FWIW I agree with Biz.

 

You don't mention your savings or expenses. Is this level of income relatively new to you or do you have quite a cash buffer?

I'd either
(a) use the income to pay down debt on the existing properties over the next 2 years.
(b) use the income to buy a property (or properties) each year with low leverage (save for x months, buy property, keep them quarantined)
(c) get yourself some blue chip shares for diversification
(d) self managed super

 

Upwards of 550k per year salary? That's amazing. I don't see how you cannot achieve your an excellent passive income in 15 years. What @Biz said about buying quality properties in inner circle major cities. Pay down, keep accumulating. With your income servicability shouldn't be a problem. Get to the desired portfolio number all the while paying down aggressively to achieve lowest possible LVRs. Then transition into the CF phase. Depending on yields you may want to sell some and pay rest, or sell some and chase high yield alternatives. Not all but some. This will allow you to still have CF with high yielding properties and also ensure your overall portfolio grows in value as your inner circle properties continue to get CG.
Also very important you find a good broker to help you structure correctly to suit your needs and aspirations.

 

Have you considered farming the depreciation credits to minimise you tax liability.

Given your income...it might be simple as doing H&L packages in growing areas or better still find an old house in a really good areas and knock it down a build say 2 houses on it. That way you have growth, income, as well as depreciation credits to minimize your tax liability.

The trouble with buying blue chip is the returns can only be 3-3.5 so you have a huge negative income. If your income ever drops that will become a real issue.

 

With sensible spending habits, you ought to be able to do incredibly well from this point by multiplying your capital.

Depends on how big of a result you want, how soon you want it and how much you are willing to learn (to reduce risk) in the process.

In your shoes, I'd find out as much as I can about development, then start on a chunky project or two with the aim of generating a few $mil of equity and great cashflow from what stock you are able to retain. Then scale and repeat. This will be rocketfuel for your wealth creation strategy. You can chat to a broker about the numbers involved and your capacity.

I recommend sitting down with some highly recommended experts to look at other things to consider in tandem (or perhaps even instead of) property though. You may find some other areas to concentrate too. I know if I were in your shoes I'd also be replying parcels of capital into startups with the aim of hitting ~10% of them.

 

You can sell and sell easily in those areas. The shortfall rental income is nothing if you have a high income and can save deposits easily. Just stash away a couple of grand a week and you have a deposit every year. The CG year on year would far outweigh any shortfall in cahsflow.

H&L packages for someone earning 500k? Come on now Sash...

 

He has a 15 year outlook so shouldn't be a problem with high income. Shouldn't he be trying to take advantage of the 15 years by buying blue chip for a almost certain CG and flip it to CF once gains are realised to achieve his goal of 500k passive?

 

Have a friend who has done this..I do this also..he is getting 30k back from the gubbermine. His income is only 250k. When he calculated the benefits....he is positive CF from day one...he get another 6-7k per house on depreciation (net of tax so real deduction is about 12-15k)..and very little maintenance.

So on a H&L say of 320k...you get the equivalent of about 3% return (just on CF+ plus depreciation)..and that is without any growth. The growth on these places have average about 60-100k in 3 years of less. You do need to pick carefully.

 

Yes...but when the blip hits...he needs to ensure he has enough cashflow to ride things out....

 

Yes - income is new, like 3 months old. No real cash buffer to speak of, but working on it since.
Before this, was on 280 - 300K this calendar year.
Before this, I was almost paying for the privilege of working.
I'm determined not to get too used to cash, thus everything is being diverted into non-deductible offsets. I'm hoping this starts snowballing as the offset interest decreases allowing larger deposits.