After reading so many post, it appears that most brokers in these forum are leaning toward I/O loans during accumulation phase. I just want to know what is the next strategy after say 20 years of keep accumulating. Do you guys mainly sell down the old ones that have gained in value to pay off the principal of the rather newly acquired ones? Or is it better to keep renewing I/O loan?
after the accumulation phase...
- Thread starter bonanzawealth
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An exit strategy is all about what suits the individual and their appetite for risk.
I am not saying any are right or wrong and please seek specific advice but you could for example:
Sell down and invest in something secure such as fixed term deposits, but ofcourse the returns are quite low.
Sell down and invest into high risk but high return such as commercial property which have high yields but come with other risks such as long term vacancy.
Keep invested in real estate and optimise your property portfolio for high CF+.
Diversify across property and blue chip shares.etc
Really it is all about what your exit strategy goal is? What income do you require to fund your retirement? If you have a small asset base and want 200k per annum then you will not achieve it in a term deposit for example.
I am not saying any are right or wrong and please seek specific advice but you could for example:
Sell down and invest in something secure such as fixed term deposits, but ofcourse the returns are quite low.
Sell down and invest into high risk but high return such as commercial property which have high yields but come with other risks such as long term vacancy.
Keep invested in real estate and optimise your property portfolio for high CF+.
Diversify across property and blue chip shares.etc
Really it is all about what your exit strategy goal is? What income do you require to fund your retirement? If you have a small asset base and want 200k per annum then you will not achieve it in a term deposit for example.
As Albanga said there are many different options to suit your own personal needs and you need to weigh up what suits you best. I personally am paying off PPOR with offset account as well as my cheapest investment property the rest are IO. that's just a extra buffer of security I personally like to have.
Don't forget inheritance.
If the exit strategy is to keep living from the CF+ properties and looking at passing it down to kids, would it be best to use trust structure? Unit or discretionary?
If we keep extending I/O term on existing loan, will bank eventually say no more? Will they force us to pay principal?
I've got a dirty little secret. Quite a few of my loans are on P&I.
On my PPOR the rational is very simple. I want to own my own home outright at some point and it's never going to become and investment property.
I tend to let my IPs got to P&I after about 10 years. The cash flow is very healthy on these IPs after that time. I don't need the cash flow they generate to accumulate more and owning them outright in retirement will give me a fantastic income without me having to really do much. It's a passive approach, but I'm far more actively investing in other ways.
It's fair to say that most of the investors I see have everything I/O all the time. I don't disagree with this approach, my circumstances are just different to most of the people I see.
The investors I've met in the strongest financial positions tend to pay down debt as quickly as they can, but they do it in a manner where they can take it back at their discretion (offset accounts and redraw depending on the circumstances).
I don't really care about inheritance. My parents will either spend everything they have or they won't, it doesn't matter. If they live as long as my grandparents did, I'll be long retired by the time they go. I also don't have children, it's not going to happen so passing it on isn't a big motivator for me. It's planned to go to extended family via trusts but I'm really not worried about it. I've got to admit, the absence of children makes life a lot easier in both the short and long term. In the meantime my nieces thing I'm a very cool uncle.
On my PPOR the rational is very simple. I want to own my own home outright at some point and it's never going to become and investment property.
I tend to let my IPs got to P&I after about 10 years. The cash flow is very healthy on these IPs after that time. I don't need the cash flow they generate to accumulate more and owning them outright in retirement will give me a fantastic income without me having to really do much. It's a passive approach, but I'm far more actively investing in other ways.
It's fair to say that most of the investors I see have everything I/O all the time. I don't disagree with this approach, my circumstances are just different to most of the people I see.
The investors I've met in the strongest financial positions tend to pay down debt as quickly as they can, but they do it in a manner where they can take it back at their discretion (offset accounts and redraw depending on the circumstances).
I don't really care about inheritance. My parents will either spend everything they have or they won't, it doesn't matter. If they live as long as my grandparents did, I'll be long retired by the time they go. I also don't have children, it's not going to happen so passing it on isn't a big motivator for me. It's planned to go to extended family via trusts but I'm really not worried about it. I've got to admit, the absence of children makes life a lot easier in both the short and long term. In the meantime my nieces thing I'm a very cool uncle.
You may not need to sell anything if you've built up enough equity and cashflow.
Just keep them IO and park the excess in offsets.
You never know when you may want some cash to take a punt on a new venture just because you're bored...
Just keep them IO and park the excess in offsets.
You never know when you may want some cash to take a punt on a new venture just because you're bored...
Ultimately the definition of wealth is simply assets less liabilities.
In the accumulation phase you build assets and keep control of cash flow enabling you to continue servicing IO debt (and P&I or offset on your own PPOR).
Once you have decided your asset base is sufficient to fund your retirement lifestyle, and you have surplus cash (as Peter said, generally over a 8 to 10 year period, most IP's are rent positive) by all means start paying down debt, personal debt first, then highest interest rate next etc. You will eventually end with higher net rental income to fund your lifestyle.
There is little point to have debt for the sake of debt itself. Using other peoples money is a method to acquire assets that you could not afford to do with your own cash funds. At a point in time lenders will request you start paying down the loan, so you either swap lenders to move to another IO period or start paying P&I.
In the accumulation phase you build assets and keep control of cash flow enabling you to continue servicing IO debt (and P&I or offset on your own PPOR).
Once you have decided your asset base is sufficient to fund your retirement lifestyle, and you have surplus cash (as Peter said, generally over a 8 to 10 year period, most IP's are rent positive) by all means start paying down debt, personal debt first, then highest interest rate next etc. You will eventually end with higher net rental income to fund your lifestyle.
There is little point to have debt for the sake of debt itself. Using other peoples money is a method to acquire assets that you could not afford to do with your own cash funds. At a point in time lenders will request you start paying down the loan, so you either swap lenders to move to another IO period or start paying P&I.
This does raise an interesting question. If you had no non deductible debt, more cash flow than you needed, you're not expecting to ever move house, why would you want I/O loans?
Some general reasons you use interest only loans are:
1. Improve cash flow to reserve it for other purposes.
2. Maintain flexibility for converting non-deductible debt to tax deductible debt.
3. Maximise your tax deductible debt to minimise non deductible debt.
If you've got great cash flow that well exceeds your requirements for investing, you eliminate reason 1.
If you don't anticipate ever turning your home into an IP, you probably eliminate reason 2.
If you have no non-deductible debt to pay off, reason 3 becomes a moot point.
Under these conditions you probably don't have any reasons to to choose to use interest only loans, so why wouldn't you have principal and interest loans so you can eventually own the assets?
I have several clients in this enviable position. They still choose interest only loans for the reason to preserve cash in offset accounts or redraw. They generally want to keep the cash for further opportunities either by having a deposit immediately available or even the full purchase price for a quick purchase.
The interesting observation I've made is that to the best of my understanding at some point, all of these people have made a deliberate effort to pay down debt. Non deductible first, then tax deductible.
Some general reasons you use interest only loans are:
1. Improve cash flow to reserve it for other purposes.
2. Maintain flexibility for converting non-deductible debt to tax deductible debt.
3. Maximise your tax deductible debt to minimise non deductible debt.
If you've got great cash flow that well exceeds your requirements for investing, you eliminate reason 1.
If you don't anticipate ever turning your home into an IP, you probably eliminate reason 2.
If you have no non-deductible debt to pay off, reason 3 becomes a moot point.
Under these conditions you probably don't have any reasons to to choose to use interest only loans, so why wouldn't you have principal and interest loans so you can eventually own the assets?
I have several clients in this enviable position. They still choose interest only loans for the reason to preserve cash in offset accounts or redraw. They generally want to keep the cash for further opportunities either by having a deposit immediately available or even the full purchase price for a quick purchase.
The interesting observation I've made is that to the best of my understanding at some point, all of these people have made a deliberate effort to pay down debt. Non deductible first, then tax deductible.
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No they don't. Generally IO loans are for a term of 5 years. They will then revert to PI under another IO term is taken. Some lenders want to reassess to extend an IO term.
However some of the major banks allow 10 or even 15 year IO terms.
If a person was going to stop employment it may be wise to extend IO terms as long as possible before giving up their job.
While some people are happy to keep their debt as they get older , once you've been around long enough you know that conditions , interest rates and what the banks will lend and what security they want can change dramatically .
I have seen person who hadn't missed a payment ,mbankrupted by a change in LVR's required by their bank manager . This was someone approaching retirement with a multimillion dollar portfolio ...
Personally , I want to go to retirement with as little debt as possible , and if we have any debt , it will be tied to as few properties as possible and I aim to have my key assets debt free , though that's not to say we won't have LOC's on properties in case we get bored ....
IMHO anything else is foolish .
Cliff
I have seen person who hadn't missed a payment ,mbankrupted by a change in LVR's required by their bank manager . This was someone approaching retirement with a multimillion dollar portfolio ...
Personally , I want to go to retirement with as little debt as possible , and if we have any debt , it will be tied to as few properties as possible and I aim to have my key assets debt free , though that's not to say we won't have LOC's on properties in case we get bored ....
IMHO anything else is foolish .
Cliff
Quoted for truth!
