Growing a large portfolio, planning to retire and reducing debt

Y

younguns

Hello fellow investors :) I hope this is the right place for this post.

My husband and I are 28 and 30 and have some big goals and until recently thought we were well on our way to achieving them until we met with our accountant who bought us crashing back down to earth and made us question our approach.

We really need some advice to get us back on track. Any help would be greatly appreciated :)

My husband is self employed and works fly-in fly-out in WA and earns an excellent income $350K approx. But it comes at a cost which is being away from our young family! Our plan was to aggressively grow our portfolio for the next 5 years (purchasing at least 1 if not two properties each year) and then plan for him to move back to Perth and work half the year, focussing the other half on doing some small developments etc (he has his builder's licence). Our ultimate goal is to be financially free by the time he is 40 (in just 9 years).

Our accountant raised some concerns with this plan particularly around being able to reduce our debt so that we are no longer reliant on such a large income and can ultimately 'retire'. We still have so much to learn and are having trouble understanding how we can continue to grow a large portfolio, service this portfolio and ultimately access our money to live the lifestyle we want WITHOUT having to sell?

Summary

PPOR (soon to be IP no.3) purchased 2008 - Western Australia 3 x 1 - purchase price $490K - current value $520K - estimated rent per week $400

IP no 1 - Melbourne 2 x 1 apartment purchased 2008 - purchase price $320K- current value $410K - rent $320 per week

IP no 2 - Melbourne 2 x 1 townhouse purchased 2009 - purchase price $465K - current value $560K - rent $430 per week

New PPOR (to settle Sept 2011) - Western Australia 5 x 2 - purchase price $700K, renovation budget $90K, conservative value on completion $850K

It is really important to us that we can see where we are going to help get through being apart so much. Our goal is to be in our 'dream house' by the beach worth approx $2 mil in 5 years time and to have enough income (approx $200K per annum) to live after servicing our portfolio.

Sorry for being longwinded and thanks in advance for your help :)
 
All your accountant is telling you is that your net income will com from net equity.
Where is the 200k "to live on" in 5 yrs coming from?
At 5% net return it will take a $4mil paid off portfolio to earn that.
Where is the money to be the $2mil beach house coming from?
How much deposit?
How much repayments?
Where is the income for it?

It's ok to have goals and ambitions, but unless you have an idea of how to get there they are only dreams and not likely to happen.
 
I don't want to sound critical, but why did you just buy a $700k PPOR? Obviously if it's a necessity then great, but you'll want to be reducing that non-deductible debt as much as possible and it will hamper your ability to start turning that ~ $2m debt (?) in to cash flow for that freedom.

On a more positive note, you do have plenty of options. Choosing the right one is key to the success of your goal.
 
Hi

Welcome, them Golden Handcuffs do come with benefits, but you have identified, there is a BIG price.

Strategy number one is to get rid of that new PPOR debt that you may get in Sep.

Im assuming there will be debt, and that you didnt say we paid cash. This would mean some form of debt recycling assuming you have some equity in the properties or across the portfolio.

Strategy number two is to make sure any debt that you have on the current PPOR that you are about to convert to an IP is strcutured in such a way as to provide max benefit

Strategy three would suggest some geographical diversification

Strategy 4 might involve some property type diversification, ie commercial

Strategy 5 could be looking at some different asset classes althogether.........property of any sort is just one way to make or lose a dollar.

Strategy 6 could be leveraging off your knowledge to build a business(es)

Your goal looks audaciously BIG to someone earning 70 -100 a k year currently, and u will get a loss of traction there. Folks cant relate to what you are trying to achieve, and they often mean well, but be careful that their fear doesnt become your weight.

Putting what you want to do into perspective of the 70 to 100 k a year earner, you are looking to make a recurring income of 40 to 57 k a year, and so talking with them about making 200 k a year passive might just as well be 5 mill a year.

Go forward and surround yourself with the right friends and advisers, that being not just sheep, but people that are real friends and advisers and will "stab you in the front" and tell you what you really need to know and hear, but be supportive and offer some ideas and alternatives.

Your accountant is a good example of someone that questions your approach, you need those types of people................to the extent that they can also offer some from of alternative.

You have an exciting journey ahead of you, and should you choose to accept it, you may also have a responseability to influence those around you in a positive way with your growth and vision.

ta

rolf
 
We had plans of retirement at 40 by buying lots of properties in our 30s. Unless the properties are all significantly cash-flow properties, or you have a lot of properties, the only way to make this work is to sell down your portfolio.

I think the first decision you need to make is for how long is your partner willing to continue the high income away from home? If he is willing to do this for the next few years, then use that money to buy a heap of properties. Ideally, buy something under market value that needs some cosmetic renovation. Then you are making money in the short term by two factors - making money on settlement as you bought lower than what properties are worth in that area, and secondly by spending 5-10K on cosmetic things that could make you another 50K. Try and buy a few each year until the income reduces.

At the point you wish to stop the FIFO job, take a look at your portfolio. Decide which properties you want to keep and which ones to sell. Ideally, you should have enough properties to sell down half. Then if there are any mortgages left over, refinance them and get 30 year loans, so the expenses on each are low.

As for the 2mil property, you will need to do a lot more work in terms of buying, renovating, selling, developing etc to have this sort of wealth. A few of the big guns in property don't actually own their own home. They pick the area they want to live in and rent. For top-end properties, rent is so much cheaper than buying. For example, in the area I would love to live, properties sell around the 3-6mil mark, but the biggest rents on them are around 2K per week. Way below mortgage repayment figure. If you can make 2K per week on passive rental income to cover your rent then you can work less or work on other strategies to create income.

I worked out that I'd need to purchase around 10-12 properties and hold them for at least 5 years to work on the selling off half strategy. We are up to 9 properties now yet I'm still not sure we have enough to pay down half and have no debt (or no significant debt). We have given up the dream of purchasing a 2mil property in our chosen suburb if we do retire at 40. If we wait til 45, we may be close to our goals.

So at this stage, you have a few options - keep working the FIFO job for longer, downgrade your PPR, or increase your retirement age. You really need to acquire a lot more property in the next 5 years to get you in the place you want to be at 40.

Those who have (or intend to) retire early have worked their arses off to get there. Are you willing to work that hard while the kids are little so you can take it easy in 10 years time? I have a nearly 2 year old and have had some time off and am looking to get back into my profession for a few years to get ahead. When your kids are 10 years older will they want to be around you or will you regret the time away by pushing for very early retirement? Sounds like you can't stop the hubby's FIFO if you want the big house and the passive income by 40.

You need to put a peg in the sand. What amount of passive income do you need to retire? Based on the rental yield of the properties you have, how many of those properties do you need to purchase to have this passive income? Or how many do you need to buy and then sell to pay down enough to generate this passive income? Or do you need to change your investment strategy to include higher-yielding properties? Without knowing this information it is almost impossible to set a retirement age.
 
Piston Broke said:
All your accountant is telling you is that your net income will com from net equity.
Where is the 200k "to live on" in 5 yrs coming from?
At 5% net return it will take a $4mil paid off portfolio to earn that.
Where is the money to be the $2mil beach house coming from?
How much deposit?
How much repayments?
Where is the income for it?
Click to expand...

Thanks for the quick response. The 200K per year to live on is what we would like to have when my husband is no longer 'needing' to work in 9 years time. The $2 mil house is where we would love to live - great schools, lifestyle etc. Our reward for working so hard and something to strive for :) - The deposit for this would hopefully come from the sale of our soon to be new PPOR. And the income will hopefully come from a reduced income of approx 200K in 5 years time, topped up by a couple of small development projects. That's my hubby's dream anyway :)
 
murph14 said:
I don't want to sound critical, but why did you just buy a $700k PPOR? Obviously if it's a necessity then great, but you'll want to be reducing that non-deductible debt as much as possible and it will hamper your ability to start turning that ~ $2m debt (?) in to cash flow for that freedom.

On a more positive note, you do have plenty of options. Choosing the right one is key to the success of your goal.
Click to expand...

Thanks for the response. I think the amount of options and the amount we have to learn is what is causing us the most distress at the moment. We really don't want to make the wrong decision. The new PPOR is a matter of necessity I'm afraid. We have two small children (and a lab!) and are living in a small 3x1 home. We are in desperate need of some more space. And, we saw a good opportunity to add some value to the new place which is in a high growth area so we can release some equity to make our next investment property purchase. We are hoping it will be worth upwards of $850K when we have finished the work.
 
Rolf Latham said:
Strategy number one is to get rid of that new PPOR debt that you may get in Sep.

Im assuming there will be debt, and that you didnt say we paid cash. This would mean some form of debt recycling assuming you have some equity in the properties or across the portfolio.

Strategy number two is to make sure any debt that you have on the current PPOR that you are about to convert to an IP is strcutured in such a way as to provide max benefit

Strategy three would suggest some geographical diversification

Strategy 4 might involve some property type diversification, ie commercial

Strategy 5 could be looking at some different asset classes althogether.........property of any sort is just one way to make or lose a dollar.

Strategy 6 could be leveraging off your knowledge to build a business(es)

Your goal looks audaciously BIG to someone earning 70 -100 a k year currently, and u will get a loss of traction there. Folks cant relate to what you are trying to achieve, and they often mean well, but be careful that their fear doesnt become your weight.

Go forward and surround yourself with the right friends and advisers...

Your accountant is a good example of someone that questions your approach, you need those types of people................to the extent that they can also offer some from of alternative.

You have an exciting journey ahead of you, and should you choose to accept it, you may also have a responseability to influence those around you in a positive way with your growth and vision.

ta

rolf
Click to expand...

Hi Rolf. Thank you so much for your comprehensive response. We do find our friends and family of all ages question what we are trying to achieve. Some even go as far as to say we are being greedy and should be putting family first! This is precisely what we are trying to do to set ourselves up for the future giving us more time with our family. Anyway, in response to your strategies above:

1: We plan to purchase this with a 10% deposit, plus costs, and will fund the renovation with some equity from our two melb properties and mothly cash savings. Can you clarify what you mean by debt recycling?

2: We have already converted our current PPOR into an interest only loan and have an offset account where our savings are sitting. Would you suggest a better option?

3: Regarding diversification, we have two melb properties and will soon have two perth ones. Our plan was to focus on Perth for the next few purchases as we now know it quite well and are working with a Perth BA.

4: We like the idea of having different types of property in our portfolio (commercial included) and are open to all options. It just depends on how much cash we have access to and the state of the market when we make our next IP purchase which will hopefully be towards the end of 2011.

5: We are interested in other investment opportunities at a later date when we are closer to achieving our goal but don't feel comfortable committing large amounts to shares etc at the moment. We know nothing about the sharemarket and are really passionate about property :) Having said that we are meeting with a new financial planner in a few weeks and they may suggest a different approach!

6: My husband has his builder's licence and would love to focus on building and developing when he moves back to Perth (hopefully in 5 years time). We would ideally like to have added a couple of small development sites in the portfolio during that time so that he can then do this when he gets back, see how he goes ad take it from there...

I know we have some pretty big goals but that's who we are. The only challenge now is making them a reality :)
 
beachgurl said:
We had plans of retirement at 40 by buying lots of properties in our 30s. Unless the properties are all significantly cash-flow properties, or you have a lot of properties, the only way to make this work is to sell down your portfolio.

I think the first decision you need to make is for how long is your partner willing to continue the high income away from home? If he is willing to do this for the next few years, then use that money to buy a heap of properties. Ideally, buy something under market value that needs some cosmetic renovation. Then you are making money in the short term by two factors - making money on settlement as you bought lower than what properties are worth in that area, and secondly by spending 5-10K on cosmetic things that could make you another 50K. Try and buy a few each year until the income reduces.

At the point you wish to stop the FIFO job, take a look at your portfolio. Decide which properties you want to keep and which ones to sell. Ideally, you should have enough properties to sell down half. Then if there are any mortgages left over, refinance them and get 30 year loans, so the expenses on each are low.

As for the 2mil property, you will need to do a lot more work in terms of buying, renovating, selling, developing etc to have this sort of wealth. A few of the big guns in property don't actually own their own home. They pick the area they want to live in and rent. For top-end properties, rent is so much cheaper than buying. For example, in the area I would love to live, properties sell around the 3-6mil mark, but the biggest rents on them are around 2K per week. Way below mortgage repayment figure. If you can make 2K per week on passive rental income to cover your rent then you can work less or work on other strategies to create income.

I worked out that I'd need to purchase around 10-12 properties and hold them for at least 5 years to work on the selling off half strategy. We are up to 9 properties now yet I'm still not sure we have enough to pay down half and have no debt (or no significant debt). We have given up the dream of purchasing a 2mil property in our chosen suburb if we do retire at 40. If we wait til 45, we may be close to our goals.

So at this stage, you have a few options - keep working the FIFO job for longer, downgrade your PPR, or increase your retirement age. You really need to acquire a lot more property in the next 5 years to get you in the place you want to be at 40.

Those who have (or intend to) retire early have worked their arses off to get there. Are you willing to work that hard while the kids are little so you can take it easy in 10 years time? I have a nearly 2 year old and have had some time off and am looking to get back into my profession for a few years to get ahead. When your kids are 10 years older will they want to be around you or will you regret the time away by pushing for very early retirement? Sounds like you can't stop the hubby's FIFO if you want the big house and the passive income by 40.

You need to put a peg in the sand. What amount of passive income do you need to retire? Based on the rental yield of the properties you have, how many of those properties do you need to purchase to have this passive income? Or how many do you need to buy and then sell to pay down enough to generate this passive income? Or do you need to change your investment strategy to include higher-yielding properties? Without knowing this information it is almost impossible to set a retirement age.
Click to expand...

Hi beachgurl. Thanks heaps for the response and congrats on your portfolio. That's very impressive! Do you mind me asking when you started? The selling down of our portfolio is exactly what our accountant is most concerned about. The properties are purchased in my husbands name because he is the main income earner. Obviously when the time comes to consolidate and pay down some loans we will trigger a capital gains debt which on its own is not so bad but when added to my husbands existing income we will be hit with a HUGE tax bill! Ideally we don't want to sell. How are you getting around/planning for this?

My hubby is prepared to do this for the next 5 years and then take on a better roster (eg 1 week off, 1 week on) which will reduce his income to approx 200K. So our plan was to purchase as many properties as sustainable during this time (at least another 5 properties bringing our portfolio up to 9 or more worth approx 6 mil with an equity position of approx 2 mil). Our strategy is definitely to value add where possible as you suggested. Our concern is that once we have settled on our new PPOR we will have approx 3,500 surplus cash a month. Which will only service so many properties and as our portfolio grows the bank is wanting larger deposits. What do you do when you hit that servicability ceiling?

Good point about renting the house we want to live in. I will discuss this along with your other great points with my husband.

Your strategy of holding 10 - 12 properties for 5 years sounds really interesting. We have sat down with our buyers agent who has plotted a plan factoring average growth rates etc of aquiring 9 properties in the first 5 years and then another 6 over the following 5 which all going well should hopefully give us a portfolio worth over 18.9mil with an equity position of 6.8 mil. Which we could then sell down as you suggested to have a passive income. My biggest question/concern is the tax man??? And, not having to rely on my hubby working away after 5 years!

Regarding the peg in the sand, i totally agree and this will be our homework this weekend when my hubby is back :)

Thanks so much again for your post. It is so nice to know there are others out there trying to achieve what we are
 
younguns said:
Hi Rolf. Thank you so much for your comprehensive response. We do find our friends and family of all ages question what we are trying to achieve. Some even go as far as to say we are being greedy and should be putting family first! This is precisely what we are trying to do to set ourselves up for the future giving us more time with our family.
Click to expand...

Meh, you will almost always get that. Its not that they are being nasty, they just dont understand, and are trying to save you from failure. The way I see it, not ever taking a risk, one has failed and has a "dead life" before even starting


younguns said:
Anyway, in response to your strategies above:

1: We plan to purchase this with a 10% deposit, plus costs, and will fund the renovation with some equity from our two melb properties and mothly cash savings. Can you clarify what you mean by debt recycling?
Click to expand...

Debt recycling uses a finance structure that aims to convert non deductible ( usually PPOR debt) to deductible debt.

younguns said:
2: We have already converted our current PPOR into an interest only loan and have an offset account where our savings are sitting. Would you suggest a better option?
Click to expand...

sounds great. Is the former PPOR fully in the hubbys name ( assuming he has the highest income?

is the property fully geared ?

younguns said:
I know we have some pretty big goals but that's who we are. The only challenge now is making them a reality :)
Click to expand...


Id suggest you have a chat with Dazz who has posted above. He is one of the positive and supportive people I was talking about..............and he has no problem with the knife in the front :)

ta

rolf
 
Good for you to get into the position you are in. My $0.02 on moving forwards.

As a couple of very similar age and comparable income to yourselves, and with similar goals (i.e. retire or wind down c. age 40) all I can suggest is trying to get there with residential property is completely bonkers.

Have a serious look at both commercial property and blue chip shares.

1. You won't need to run a highly leveraged portfolio with losses and be "chained" to your job. Its actually worse for you as well as it sounds like you only have one income. A resi strategy will only work if you leverage up to the eye balls, actually have some CG, then you sell down, pay tax, and re-invest in other asset classes. A mining bust, fall in resi property, or a sickness and you're completely wiped out. Especially in this market I can't see highly leveraged resi IP getting anybody anywhere fast.

2. You can easily save a deposit / have equity for a c $1m Comm IP in the near term. You have passed the "barrier to entry" that most here can't. As such stop wasting your time on resi. Such a commercial property (or shares) should yield NET $60 - 70k without a problem. Two of those and you're home and hosed.

3. You can then debt recycle from your PPOR into the Comm IP. If you are disciplined it shouldn't take long to go +cashflow on that type of investment as you pay down loans. I am not sure if you are working or not but if not think about buying in a discretionary trust.

On your rents for your resi IP's you are lucky to be cracking 3% net. You ain't gonna be retiring anytime soon on that. If you had some skill (and patience in managing a stable of slum tenancies) in acquiring high yielding resi IPs my thoughts would be different, but your are going to dig yourself a hole with your current strategy :D

Just to illustrate - to use your numbers:

_____________

PPOR (soon to be IP no.3) purchased 2008 - Western Australia 3 x 1 - purchase price $490K - current value $520K - estimated rent per week $400

IP no 1 - Melbourne 2 x 1 apartment purchased 2008 - purchase price $320K- current value $410K - rent $320 per week

IP no 2 - Melbourne 2 x 1 townhouse purchased 2009 - purchase price $465K - current value $560K - rent $430 per week

___________

Total purchase prices - $1.46m
Total gross rent - 1150 per week, c. $60k p.a.
Estimated expenses - $3000 per property (rates, body corporate, water, insurance, etc.) = $9000 p.a.
Net Rent = $51k p.a.
Net Yield on purchase = c. 3.5%

If you had a pretty boring CIP at 6.5% yield (net) - a very conservative estimate - that would have been $95k in rent - a whole $44k better off. And if you are into industrial stuff you're yield will be a lot higher than 6.5%

As you can see you need a much smaller portfolio to get to your end destination and you would have been half way there in your accumulation phase.

And as everybody says a $2m PPOR and you'll be working til your 40's or 50's. Having a cheaper PPOR for as long as you can is key.

Anyway not advice, just my $0.02 worth.
 
Pffft, I'm not sure what you're worried about.
Call Steve Navra. You will find his number in older threads here on SS.
Landlubber is also another living the dream to chat with.
This is LOE, and should be easily achievable because you are both young.

Otherwise your accountant is right and you will have to wait for capital gains and then sell half. You will unfortunately lose alot of money in the process and halve your assett base.
I wish you all the best! :)
 
The Y-man said:
Actually.... need more info....

What's the loan figures (and interest %)?

The Y-man
Click to expand...

Hi there. Sorry I only got half way through responding to everyone when mum duty called :)

Total of all loans come this September will be 1,982,755.00 with a total value before the reno on the new PPOR of 2,190,000.00. The estimated value of the entire portfolio after completing the reno on the new PPOR will be 2,340,000.00. Interest rates are all variable. Thanks again
 
BuildingBlocks said:
Considering the large income and the ambitious goals, why are you waiting this long to buy again?

You are going to need to speed things up to hit your goals :)
Click to expand...

Thanks for the response :) We would have loved to get another one or even two allot earlier but hubby went self employed as a contractor two years ago this June and the banks said they wanted two years business financials before they would remortgage and lend more funds :(
 
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