Do you have an IP Financial Plan to get you to retirement?

Hi all,

Yes Duncan it is a pretty spreadsheet.

But you make many assumptions.

You assume that rental return is 5% and only goes down to 4.6% over the time of your plan.

You assume there are no costs for PM, or vacancies, or maintenance and repairs.

You assume that there nice regular cap gain increases.

You assume a persons mental state as to regarding how well the system works, will be logical throughout time. For example if there is no growth for the first 8 years yields have only gone from 5% up to 6.6%. As interest rates are now 11.5% and been rising, how confident in your scenario would a normal rational person be??
At this point with LVR at 76% and interest at $66,000 above gross rental return, your partner may be thinking you were doing something wrong!, especially considering the portfolio was cashflow positive when you started, and your LVR was only 61%.


bye

P.S. Where is the year/years of neg growth in the spreadsheet? or is the possibility of negative growth not on your radar.

Bill.L said:

Hi all,

Yes Duncan it is a pretty spreadsheet.

But you make many assumptions.

You assume that rental return is 5% and only goes down to 4.6% over the time of your plan.

You assume there are no costs for PM, or vacancies, or maintenance and repairs.

You assume that there nice regular cap gain increases.

You assume a persons mental state as to regarding how well the system works, will be logical throughout time. For example if there is no growth for the first 8 years yields have only gone from 5% up to 6.6%. As interest rates are now 11.5% and been rising, how confident in your scenario would a normal rational person be??


bye

P.S. Where is the year/years of neg growth in the spreadsheet? or is the possibility of negative growth not on your radar.

Click to expand...

Bill,

You can add your own figures in, which is what I invited you to do. Go ahead Knock yourself out.. but apply the same test to your own structure.. you'll note even with some negative growth thrown in here and there, its still very stable.

Over 30 yrs, the average growth in the off the cuff figures I entered, was still an unbelievably low 5.9%... unheard of over a 30year period. There's even periods of high interest rates in there.

Yes it started out as MARGINALLY cashflow positive.. $35,000 before costs.. not much to live on.. to achieve the same thing through rental income alone a whole lot more growth in rental income was required.. they'd have been working for another 10 years at least..

Bill.L said:

At this point with LVR at 76% and interest at $66,000 above gross rental return, your partner may be thinking you were doing something wrong!, especially considering the portfolio was cashflow positive when you started, and your LVR was only 61%

Click to expand...

The partner needs to focus on the ever increasing Net Worth. Thats the SANF factor.

Duncan,

You missed the point, you have a DECREASING net worth when the gains are not there.

Your SANF tolerance level will be greatly challenged when you have increasing debt associated with higher interest costs AND lower equity.

( and none of us know how we will handle it until we get there)

bye

Bill.L said:

Duncan,

You missed the point, you have a DECREASING net worth when the gains are not there.

Click to expand...

I'm happy to work again if I dont feel comfortable AT THAT TIME in spending money I havent made... Swings and Roundabouts Bill.. we're talking a 30 yr time frame.. to panic over a few periods of potential negative capital gains and to vehemently argue against the strategy is akin to someone looking at property and saying "no thanks, I dont want to be in debt! and the Tenants will only trash my house anyhow".

duncan_m said:

Bill,

Here's a rough spreadsheet for someone with $1.3M in equity.. good rental income, and is capable of living on about $70K a year, there's columns you can play with for Growth, Interest Rates, Equity Draw Down percentage.. there's a column for inflation (to index the rental income), there's a column for Net Worth because we're drawing down less than our portfolio is growing at in some years.. There's a column for the increase in interest costs due to the new draw downs..

Please show me where a foreseeable set of circumstances is going to cause this person to come off the rails (not my own figures). And please also show me where that SAME set of circumstances wouldnt also affect the person living off JUST rental income...

Note that this is a BARE BONES approach, the drawn down equity is just SPENT, not re-invested AND the ever-decreasing LVR is NOT put to use in other asset classes in cycles that are maybe inverse to the property market at that time.. in other words the LAZIEST, MOST risk prone way to invoke this strategy. Gosh, and even with an average growth over 30 years of just 5.19%!

This is of course assuming that the borrowings will always be available.. if they ever WERENT then you'll note that the NET WORTH column which has been steadily increasing would enable someone to sell the lot, pay CGT, and then invest the proceeds in other income producing investments.

Click to expand...

Duncan:

I am not against your strategy. However, look at your spread sheet. It almost exactly matches my portfolio in terms of value and LVR (in year 2006) except for those:

1. the column of Rental Income. My total rental income is almost A$30K less than interest payments.
2. I have not received all land tax bills this year. However, I believe it should be about A$10K; I can't see that in your spreadsheet.
3. All others fees account more than $10K. I can't see that either.
4. On another hand, I have A$25K better off from Tax return. Other retired people may not have this benefit.

May be my properties are in Sydney with low yields.

Well, I am actually following what SC and Bill's way to build my own portfolio within last few years.

In saying that, I think your strategy is fine. I will explore it more in the future subject to my fortfolio is increasing in line with history growth.

With 10M porfolio, draw down $100K per year is extreamly safe. It is only 1% of 10M porfolio value anyway.

I am looking forward to Steve's topic - Portfolio Balancing:
$5M property with $4M debt;
plus
$5M share with $2.5M loan;

Question to Steve:

How do you suggest your clients to allocate/balance those $5M share investments so that it can provide all costs as well as livings?

In summary, I believe all of above arguments (Duncan's, SC's, Bill's as well as Steve's) are valid depending on what position you are and how do you view them.

Thank you all!

TGP

ToGetProperty said:

Duncan:
1. the column of Rental Income. My total rental income is almost A$30K less than interest payments.
2. I have not received all land tax bills this year. However, I believe it should be about A$10K; I can't see that in your spreadsheet.
3. All others fees account more than $10K. I can't see that either.
4. On another hand, I have A$25K better off from Tax return. Other retired people may not have this benefit.

Click to expand...

The spreadsheet wasn't an exercise in minutia factor in your own individual circumstances.. Or better yet! Pay Navra and his merry band to do it.

Duncan,

Your plan that would put you back to work, what happens if you are 70 when the crunch came??

What if instead of living off equity, you had sold some ( NOT ALL) of your properties to reduce the debt. You then placed the gains from the sold properties (after CGT tax) into offset accounts against your remaining properties, and lived off the income produced.

That sounds like a less risky plan to me. I don't have a decreasing net worth (unless property prices decline), I have a large buffer of cash that I can use whenever I chose (including for more investments if so desired). I have a growing cashflow from the rents increasing (inflation). I still have growth assets.

I'm sure I read about something like this in a book somewhere.

Ahh here it is!!

Here is a link for you so you can purchase a copy for yourself.

http://www.somersoft.com.au/Book4.htm



bye

Bill.L said:

Duncan,
Your plan that would put you back to work, what happens if you are 70 when the crunch came??

Click to expand...

Well, if those figures WERE mine.. and if the crunch came at 70 (in 35 years time).. I'd be worth millions.. I'm not sure I'd be losing any sleep nor would I in my wildest dreams be contemplating going back to work..

Bill, can't you see the huge amount of fat built into this very realistic scenario?And if you look at the spreadsheet again you'll also see a big fat arithmetic error that when fixed.. makes the whole thing look even better.. (the positive cashflow is never used in the spreadsheet).

duncan_m said:

The spreadsheet wasn't an exercise in minutia factor in your own individual circumstances.. Or better yet! Pay Navra and his merry band to do it.

Click to expand...

Ducan

I found the discussion very intersting and as it adds a new way of looking at property investment.
I have modified the spreadsheet to allow for my retirement 10 years down the track with the only equity withdraws being for further investment for the portfilo every 3 years.
It really is an interesting idea.

Peter

madmurf said:

Ducan

I found the discussion very intersting and as it adds a new way of looking at property investment.
I have modified the spreadsheet to allow for my retirement 10 years down the track with the only equity withdraws being for further investment for the portfilo every 3 years.
It really is an interesting idea.

Peter

Click to expand...

Big defect in it.. but it only makes it better

Fixed one below.. (cashflow positive rental now taken into account).

Don't forget the spreadsheet only shows the LEAST effective way to implement the strategy, its a worse case scenario.. no use of lazy equity etc.

duncan_m said:

Big defect in it.. but it only makes it better

Fixed one below.. (cashflow positive rental now taken into account).

Don't forget the spreadsheet only shows the LEAST effective way to implement the strategy, its a worse case scenario.. no use of lazy equity etc.

Click to expand...

Hi Duncan_m

Here is another way to look at the current market and for the next few years. Although I'm not the doom and gloom person, I think that looking at the both sides of the coin may be helpful.

If you were living off your CF+ rental income, this would not happen to this extent, which in my mind is bankrupt.

Thx
V

Panic said:

Hi Duncan_m

Here is another way to look at the current market and for the next few years. Although I'm not the doom and gloom person, I think that looking at the both sides of the coin may be helpful.

If you were living off your CF+ rental income, this would not happen to this extent, which in my mind is bankrupt.

Thx
V

Click to expand...

As Steve says "Dont spend it till you've made it". In which case bannkruptcy of course is never an option..

Not sure what your point is really.. allowing the LVR to get above 80% and then to blindly keep on spending it up to 98% is fanciful, a) the banks would never let it happen, b) only a freaking moron would do it anyhow.

As it stands.. that sample portfolio isnt cashflow positive enough to the point where you could live on it.. its years away from it.

Doom

Panic said:

Hi Duncan_m

Here is another way to look at the current market and for the next few years. Although I'm not the doom and gloom person, I think that looking at the both sides of the coin may be helpful.

If you were living off your CF+ rental income, this would not happen to this extent, which in my mind is bankrupt.

Thx
V

Click to expand...

Those figures are pretty bad -%10 for three years in a row.
If my investment were that bad I would shoot my self and be done with it

Hi Everyone,

Very unrewarding to see Duncans' spreadsheet attacked

The rational approach is to drawdown 2% less than the CG in any year.
This way the system will always sustain itself . . . and the drawdown amount should be sufficient to render the portfolio cashflow +

Lazy equity SHOULD be employed.

Regards,

Steve

duncan_m said:

As Steve says "Dont spend it till you've made it". In which case bannkruptcy of course is never an option..

Not sure what your point is really.. allowing the LVR to get above 80% and then to blindly keep on spending it up to 98% is fanciful, a) the banks would never let it happen, b) only a freaking moron would do it anyhow.

As it stands.. that sample portfolio isnt cashflow positive enough to the point where you could live on it.. its years away from it.

Click to expand...

I agree with Steve and the rest saying "Dont spend it till you've made it", but would add to it, "till you really made it" not only on paper.

In regards to the LVR, I agree with you that you would have to be a moron to keep on spending, and yes, banks would not allow it, but simple modification to the percentage numbers and you are below the 80% LVR.

My point is that more property, means more debt in your system, which is very volatile to the market conditions.
I would love to be able to retire only on property, dont get me wrong, I just dont think it is likely. And when I say property I mean fully paid off and only CF+, not to mention to retire only on equity....It will take more then just property (shares, cash etc) to design the retirement plan.

Thx
V

I alas cannot contribute to the accumulated wisdom above - still in learning stage.

Want to give all participants big thankyou for a great thread and please.................continue I'm learning, learning.

So come on now,

Steve Navra said:

Hi Everyone,

Very unrewarding to see Duncans' spreadsheet attacked

The rational approach is to drawdown 2% less than the CG in any year.
This way the system will always sustain itself . . . and the drawdown amount should be sufficient to render the portfolio cashflow +

Lazy equity SHOULD be employed.

Regards,

Steve

Click to expand...

Steve:

Panic's spreadsheet is quite reasonable with 3% rental NET return with possible -10% growth for next two years and flat for few years after that. Well, I hope it is not.

Regards

TGP

Hi everyone,

I haven't finished reading this thread but thought I would add my comments.

I have been investing in property for 4 years, read all the books, changed my strategy a few times, and procastinated too much. I think that I would be much further in front today had I had a bit of a plan. If you can see the direction you are heading you tend to move faster.

I am now working for a company that writes individual plans for people, and hold their hand through the whole process for the long term. We are all completely different, different financial situations and different goals. What suits one person does not another.

In a very brief description my 10 year plan is to own approximately 8-10 near new to new (depreciation keeps the out of pocket expenses very low) properites in high growth areas. These will be my foundation properties in and will be negatively geared slightly. Going that property doubles every 7-10 years if I were to sell all these properties take out all taxes, fees and pay out my own home I would be left with approx $1.6 million. I could either put this money into a fund that returns 10% or more and live off this income OR I could sell half and live off the rent of the other half.

Whilst building my foundation properties I will also buy positive cash properties for a bit of cashflow and to help my borrowing capacity. I will also be involved in property trading eg syndications, put and call options, renovating etc. This will be my lifestyle money and also to pay off debt on my home.

To help fund the neg geared properties I will set up a running account or if I don't want to work anymore I will start drawing income from these properties. As long as your debt is always well under the growth there really isn't any risk.

For all the negative people out there even if your properties don't double in 10 years some money is better than no money, and it's a fund way of making it.



Bye

of wood and trees

Great thread!

I think the debate's meandering a bit though. So just my 2.2 cents worth to try to refocus things.

I think we're all agreed that the goal is to acquire a substantial property portfolio and in particular as much equity as possible.

The question then is how does the portfolio/equity provide you with financial freedom/provide for your retirement? Ie what's the exit strategy? or to borrow from the superannuation context, how do you transition from accumulation phase to "pension" or income phase?

Option 1: live off the rent.
Option 2: sell some/all and live off the proceeds or the earnings from those proceeds.
Option 3a: keep your properties and draw the equity to live on
Option 3b: keep your properties, draw the equity to invest in another income producing asset, live off the earnings (plus perhaps some equity)

Some observations:

Option 1 requires a much higher asset base than option 3 due to our tax system. Thus, in my view it is inefficient as it takes longer to get to the desired goal.

There's a one-off cost associated with option 2, namely agent's commissions, (perhaps NSW vendor duty), capital gains tax and potentially some entry costs for whatever asset you put the proceeds into pending your spending them. In my view that option is therefore inefficient. Also, cash is not a growth asset so inflation will wear down your nest egg. The pitiful amount of interest you'll currently earn on that money is also taxable.

Option 3a avoids the option 2 costs but has an annual cost (ie interest) attached to it. There is however no doubt that you can achieve the same level of income as option 1 with a much smaller property portfolio. Interest is only payable on the funds actually drawn. As this is a return of your own capital it is tax free in your hands so it's actually equivalent to a much higher taxable income.

Option 3b avoids the option 2 costs (other than entry costs for new income producing assets) and has the added advantage over 3a that you're likely to be diversified across different asset sectors. The downside risk is whether the assets you buy with the drawn equity will perform in excess of the cost of that money. (But really that's the same category of risk you took when buying your properties, ie that the future returns would exceed your cost of funds plus a margin for the risk you took and a return on your capital at risk.)

Horses for courses, but I'd always prefer efficient over inefficient because it equates to sooner rather than later and easier rather than harder...but then I'm one of those late Gen-X slackers...

Cheers
Nigel.

NigelW said:

Great thread!

The question then is how does the portfolio/equity provide you with financial freedom/provide for your retirement? Ie what's the exit strategy? or to borrow from the superannuation context, how do you transition from accumulation phase to "pension" or income phase?

Option 1: live off the rent.
Option 2: sell some/all and live off the proceeds or the earnings from those proceeds.
Option 3a: keep your properties and draw the equity to live on
Option 3b: keep your properties, draw the equity to invest in another income producing asset, live off the earnings (plus perhaps some equity)

Click to expand...

Good summary.

I don't know how to make a poll for others to vote on this. I will choose Option 3b no matter how big or small my portfolio is.