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

[Steve Navra]

I'm wondering if it is along the lines of 'the chicken and the egg'. Which one comes first?

Obviously the egg comes first

If you have increased Equity, you draw it down and buy an income stream, say from shares. Fine. But many would probably ask how you can draw the equity down as say a LOC to purchase the shares without the 'job type income' to satisfy the banks serviceability issues in many cases?

Aha, the method is simply to get the banks to recognise that the shares will produce the necessary income. Note that this is no different to a bank recognising that rental income will form part of the serviceability income . . . even though you haven't as yet bought the IP and the rental income is still in the future.

Regards,

Steve

 

[kissfan]

Most people will need 10 properties or more before they are in a position to take stock and plan the next stage...cashflow.



Sailesh

Hi Sailesh.

Assuming 10 properties are required, in your estimation, how much did/does each property cost and more importantly how much rent is each property achieving.

Regards
Marty

 

[madmurf]

Confused

Originally Posted by Rixter
Hi Pete & Spiderman,

Yes the CGA strategy I've developed utilises a regular purchasing cycle similar to what Dollar Cost Averaging is to the sharemarket. The major underlying principle to its success is it relies on your "time in" the market, NOT "timing" the market, and never never sell. So in other words it does not matter whether you buy at the top of a boom or at the bottom, just so long as you purchase good quality, well located property in high density areas ( metro area capital cities), at or below fair market value, on a regular basis. I've been purchasing IP per year.

I've been purchasing new or near new property over older style property for several reasons, the main ones being (in no particular order) -

1/ To maximise my Non-Cash deductions
2/ To minimise my maintenance & repair costs
3/ More modern & Attractive to tenants - thereby minimising potential
vacancy rates
4/ Ask a higher rent - thereby Maximising yields

Without getting into the "which is better debate, houses or Units??", I preferr to purchase Townhouses & Villas with a 30% or greater land component thereby eliminating multi story units or high rise apartments, for several reasons. The mains ones being (in no particular order) -

1/ lower maintenance & upkeep for the tenant
2/ lower purchase or entry level into a Higher capital growth suburb area
3/ rapidly growing marketplace (starting both now & into the future) wanting these type properties. This is due the largest group of people to ever be born (being the Babyboomers and Empty nesters) starting to come into their retirement years. They will be wanting to downsize for the following main reasons - lifestyle & economic.
4/ greater tax advantages & effectiveness.
5/ able to hold more individual properties spread across your portfolio - thereby minimising area over exposure risks by not holding all your eggs in only a few baskets, so to speak

I look to buy in areas with a historic Cap growth of 7%pa.

Getting back to CGA, as the name suggests it averages out the capital growth achieved on individual properties with your portfolio throughout an entire property cycle, taking into account that property doubles in value every 7 - 10 years. Thats 7%pa compounding.

The easiest way to explain what Im meaning by this is to provide a basic example taking into account that all your portfolio cashflow will be serviced via Rental income, the Tax man, an LOC and/or Cashond structure.

For ease of calculation lets say we buy a property for $200k, so in 10 years its now worth $400k. Now lets say we do that each year for the next 7-10 years. Now you can quit the rat race.

So in year 11 ( 10 years since your 1st Ip) you have 200K equity in IP1 you can draw out (up to 80%) Tax free to fund your lifestyle or invest with. In year 12 you do exactly the same but instead of drawing it from IP1 you draw it from IP2. In year 13 you do the same to IP3, in year 14 to IP4, etc etc etc.
You systmatically go right through your portfolio year by year until you have redrawn from each property up to year 20.

So what do you do after you get year 20 I hear you say ?? hmmm..well thats where it all falls into a deep hole - You have to go get a JOB nope only joking

You simply go back to that first IP you purchased as its been 10 years since you drew upon it first time around and its now doubled in value so you complete the entire cycle once again. Infact chances are you never drew each property up 80% lvr max , so not only have you got entire property cycle of growth the spend you still have what you left in it first time round that compounded big time. Now you wealth is compounding faster than you can spend it! What a problem to have

Getting back to what I said in my opening paragraph about it does not matter where you buy within a property cycle just so long as you do buy, This is because you will not be wanting to draw upon it until 10 years later after its achieved a complete cycle of growth.

Well thats the Basic Big Picture of CGA. Once its set up its a self perpetuating, equity to TAX FREE cashflow conversion income money machine





Im a little confused on this one.
I understand the CG after 10 years to have doubled and you then withdraw
the capital up to 80% for your personal needs.
Now the question is how is it going to be TAX FREE and how do you service the loan now it has also almost doubled.?

Thanks

 

[Sultan of Swing]

Im a little confused on this one.
I understand the CG after 10 years to have doubled and you then withdraw
the capital up to 80% for your personal needs.
Now the question is how is it going to be TAX FREE and how do you service the loan now it has also almost doubled.?

Thanks

Ok, the best one to answer this of course is Rixter but my understanding of this is....

As the IPs double in value, so do the rents, hence servicability.

Secondly, the 'tax free' part comes from revaluing the IP, setting up an LOC and buying a cashbond or annuity (are they the same thing?) which then provides income for living and perhaps contribute to servicability. I'm not sure about the tax free side of it but maybe Steve Navra or Rixter can explain this a little more.

Hope that helps a bit.

Cheers

 

[quiggles]

The tax free part is relatively simple. You are borrowing money - when was the last time you paid income tax on the funds you borrowed?

I have not yet come to terms with this - it makes me profoundly uneasy.

 

[Steve Navra]

Secondly, the 'tax free' part comes from revaluing the IP, setting up an LOC and buying a cashbond or annuity (are they the same thing?) which then provides income for living and perhaps contribute to servicability. I'm not sure about the tax free side of it but maybe Steve Navra or Rixter can explain this a little more.

The cashbond (which is a type of annuity) is ONLY NECESSARY if serviceability is required.



In this case the amount placed in a cashbond should provide sufficient income to:

• Service the loan

• Provide income for living needs. (Financial independence)

If serviceability is NOT a requirement then:

• One could simply live off the capital in the LOC

• Or, invest the dollars in a share income fund (better return than LOC)

In all cases you are spending CAPITAL, which is NOT taxable.

You can spend until your capital runs out
Well it is tax free and you will have a ball whilst it lasts



The real point is that you MUST by necessity hold enough assets so that the CG you are achieving is GREATER than the capital you are spending . . . in this way your portfolio continues to increase, despite the fact that you are living off capital.


Regards,


Steve

 

[see_change]

The tax free part is relatively simple. You are borrowing money - when was the last time you paid income tax on the funds you borrowed?

I have not yet come to terms with this - it makes me profoundly uneasy.

An ever increasing amount of Debt.... You're not the only one.

Part of it has to do with the scale. While I'd guess there are many around who would feel comfortable with having an LVR of 80 % on a property portfolio of 1 mill, I'm not sure how many would feel the same degree of comfort with an 80 % LVR on a portfolio of 10 million.

See Change

 

[quiggles]

I obviously need an education here, but my scenario has rents increasing much more slowly than house prices. With that you fall behind eventually as your serviceability needs increase because you are spending a significant proportion of your capital growth while never reducing your interest bill - it is compounding, in fact.

I'm sure that compared to some I'll have asset rich, income poor proportions. But that's OK, just so long as I start from asset megarich .

 

[Steve Navra]

Part of it has to do with the scale. While I'd guess there are many around who would feel comfortable with having an LVR of 80 % on a property portfolio of 1 mill, I'm not sure how many would feel the same degree of comfort with an 80 % LVR on a portfolio of 10 million.

BUT it is just 10 portfolios of $1,000,000 each

A 10 million dollar property portfolio will at 5% CG produce $500,000 per year.

Now perhaps you are worried that you cannot produce 5% every year?

Well . . . tell you what:
Delay your retirement by one year and wait to see what the result is:

AFTER
1st year CG 1% (Sorry, you only have $100,000 to live on)
2nd year CG -3% (Sorry you will have to waste $100,000 of capital just to survive. )

Now after this disaster year your portfolio has decreased to $9,900,000

3rd Year CG 2% (Sorry, only $100,000 to live on and put the other $100,000 back into your LOC.)

Okay so back to $10,000,000

4th year CG 5% (Whoopee $500,000 . . . tell you what: Let's not be wasteful, blow $200,000 and reinvest the balance)
5th Year CG 0% (Okay you can spend $100,000 of the $300,000 you reinvested)
6th year CG -1% ( $100,000 for you and $100,000 to make up the -1%)

Portfolio still $10,000,000

7th year CG 14% ($1,400,000 Hmmmm, maybe that Ferrari and an O/S trip is looking good + spending money And so on . . .

Average CG over the 7 years = 2.43% (Hardly a property boom)

SUMMARY:
$10,000,000 is better than $1,000,000
Scale is the same (LVR = 80%)

Sorry see_change, but I've never understood what you are concerned about when you refer to scale


regards,
Steve

 

[Alan H]

An ever increasing amount of Debt.... You're not the only one.

Part of it has to do with the scale. While I'd guess there are many around who would feel comfortable with having an LVR of 80 % on a property portfolio of 1 mill, I'm not sure how many would feel the same degree of comfort with an 80 % LVR on a portfolio of 10 million.

See Change

I guess it's all relative isn't it SC.

I remember watching this show years ago where a stuntman was trying to describe to a reporter how he needed to have a different mindset to do his job.

By way of example he took a 2 metre long plank down to the beach and sat it quite firmly on two rocks about 30cm off the ground. The plank was quite firm and was wide enough to walk across quite safely. The stuntman walked from one side to the other and then invited the reporter to do the same thing. "No problem" said the perplexed reporter, and he followed him across.

Then at the stuntman's request they walked up the winding track to the cliff above the beach. There 50m above the beach was a 2 metre gap between two very solid rock edges. The stuntman placed the plank across the gap very securely, walked across it and then invited the reporter to follow him.

"You're mad! I'm not going across that" said the reporter.

"But it's the same gap, same plank and it's placed just as firmly" said the stuntman with a smile. "And that is the mindset that allows me to be a stuntman. Realistically there is no more chance of me falling off this one than the one below. You see it as a 50m drop, I see it as being no more dangerous than a 30cm drop".



I guess the good thing about developing a portfolio incrementally, is that it allows us to get used to ever increasing debt(and equity for that matter) doesn't it?.

Whether $800K debt on a 1 million portfolio or 8 million debt on a 10 million portfolio, they're both 80% LVR.

Funny how one can make us feel like we're 30cm off the ground and the other can make us feel 50m off the ground though isn't it?

 

[quiggles]

My concern is entirely different.

I have my $10m portfolio and I'm drawing $100,000 per year.

By year 10, $70,000 of my income is going into servicing debt.

I haven't done the figures, but for mine it's not good. And because I'm eating capital, I can't pay the debt off even in a good year. After all, if I borrow $1m to pay of $1m debt I'm left with (drum roll) $1m debt. and a 70K interest bill.

If I earn money the debt is not tax deductible - it was for living expenses. And THAT's my concern - a prolonged slump, or a refusal by banks to lend to you and you're stuffed. I sounds like riding th tiger, and the only way to dismount is by selling you prorperties. Hellooooo, CGT etc.

I don't want anyone to get offended, these are personal viewpoints. I have the greatest respect for contributors such as Steve and Rixter. But I reckon I'd have a zero SANF if I did this.

 

[Alan H]

My concern is entirely different.

I have my $10m portfolio and I'm drawing $100,000 per year.

By year 10, $70,000 of my income is going into servicing debt.

I haven't done the figures, but for mine it's not good. And because I'm eating capital, I can't pay the debt off even in a good year. After all, if I borrow $1m to pay of $1m debt I'm left with (drum roll) $1m debt. and a 70K interest bill.

If I earn money the debt is not tax deductible - it was for living expenses. And THAT's my concern - a prolonged slump, or a refusal by banks to lend to you and you're stuffed. I sounds like riding th tiger, and the only way to dismount is by selling you prorperties. Hellooooo, CGT etc.

I don't want anyone to get offended, these are personal viewpoints. I have the greatest respect for contributors such as Steve and Rixter. But I reckon I'd have a zero SANF if I did this.

Hi Quiggles.

The SANF is obviously vital and I know I struggle with some of the concepts at times too.

However, a couple of points:

1. If the 10mil property portfolio only grows at 3%pa for the 10 years it will be worth 13.5mil at the end of the period giving an annual average growth of $350K pa. Those annual debt repayments all of a sudden don't seem so big.

2. I think the bigger challenge will be to get to the 10mil portfolio than pay the interest on a $100K drawdown each year.

 

[see_change]

Whether $800K debt on a 1 million portfolio or 8 million debt on a 10 million portfolio, they're both 80% LVR.

Funny how one can make us feel like we're 30cm off the ground and the other can make us feel 50m off the ground though isn't it?

The difference is the consequences if you slip or the some extraneous factor happens to disturb the environment you're working in.

There is less risk associated with working 30 cm of the ground compared with 50 m.

See Change

 

[Alan H]

The difference is the consequences if you slip or the some extraneous factor happens to disturb the environment you're working in.

There is less risk associated with working 30 cm of the ground compared with 50 m.

See Change

But then a rock could fall off the cliff and kill you if you're on the 30cm plank which couldn't happen if you were at the top of the cliff!

I take your point though SC. I guess everything we do is about calculated risk. I guess I'm just saying it's funny how we(and that includes me!) look at comparative risk.

I hop in the car each day and drive to work. Is it more likely as an investor with a reasonable debt that I will have a serious car accident or interest rates will rise 3-4% in the next 2 years? Probably it's more likely I could have a car accident and yet I probably worry more about the interest rates.

 

[see_change]

My concern is entirely different.

I have my $10m portfolio and I'm drawing $100,000 per year.

By year 10, $70,000 of my income is going into servicing debt.

I haven't done the figures, but for mine it's not good. And because I'm eating capital, I can't pay the debt off even in a good year. After all, if I borrow $1m to pay of $1m debt I'm left with (drum roll) $1m debt. and a 70K interest bill.

If I earn money the debt is not tax deductible - it was for living expenses. And THAT's my concern - a prolonged slump, or a refusal by banks to lend to you and you're stuffed. I sounds like riding th tiger, and the only way to dismount is by selling you prorperties. Hellooooo, CGT etc.

I don't want anyone to get offended, these are personal viewpoints. I have the greatest respect for contributors such as Steve and Rixter. But I reckon I'd have a zero SANF if I did this.

Actually Quiggles ,this is my concern about the whole system.

At Steve's last seminar I asked him what would happen if there was a prolonged slump as you described and his answer was one word .

That answer to to quote him was " Disaster ".

While there are many safeguards within Steve's system , and the likelihood of that happening are small , I believe I can conduct my personal path to wealth with out that risk.

See Change

 

[natmarie73]

Wouldn't it be better to draw down on your capital and instead of spending it - use it to create additional income ie via shares or something. For example if you have $500000 in equity draw down what you can and use it to say invest in shares for dividend or trade for income as mentioned before. Say you make 10% for the year there's $50000 to live off and you still have your equity which should keep increasing.

Of course you need to know what you're doing (education) and there is risk (what if share market crashes) but I would feel better using my equity to create additional income rather than spend it on living expenses.

Well that's my plan anyway...

Nat

 

[see_change]

I hop in the car each day and drive to work. Is it more likely as an investor with a reasonable debt that I will have a serious car accident or interest rates will rise 3-4% in the next 2 years? Probably it's more likely I could have a car accident and yet I probably worry more about the interest rates.

That's why I drive a Volvo

See Change

 

[NigelW]

Wouldn't it be better to draw down on your capital and instead of spending it - use it to create additional income ie via shares or something. For example if you have $500000 in equity draw down what you can and use it to say invest in shares for dividend or trade for income as mentioned before. Say you make 10% for the year there's $50000 to live off and you still have your equity which should keep increasing.

Of course you need to know what you're doing (education) and there is risk (what if share market crashes) but I would feel better using my equity to create additional income rather than spend it on living expenses.

Well that's my plan anyway...

Nat

And of course the added bonus here is that your interest is tax deductible!!!

 

[Alan H]

That's why I drive a Volvo

See Change

Hmmm.......a Volvo driver.

You're probably adding EXTRA risk to the rest of us on the road!!

 

[see_change]

Hmmm.......a Volvo driver.

You're probably adding EXTRA risk to the rest of us on the road!!

Actually the 850's are quite a nippy car though I prefer my " Thrills " off the road.

http://www.somersoft.com/forums/gallery/showphoto.php?photo=1184

http://www.somersoft.com/forums/gallery/showphoto.php?photo=1183

and my latest purchase ( not my boat or me on it )

http://www.hobiecat.com/sailing/gallery.php?model=17sport&img_num=08&res=hr

See Change