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

Hi all,

It is common knowledge that those that succeed have not only a goal but also a plan of getting there. I'm keen to know how others have contructed a plan.

How much to retire on?
My personal preference here is $75k gross for my wife and I. But I still have to take out property managers fee. In Perth (we're more expensive) 9.35% for Management fee, Letting Fee 1week rent plus 2 x GST, plus inspections -say $200 per property p.a., plus some other minors.
We now have $75k less say $10k property fee. The only deductions I would count on are those for PM expenses as in 30 years time there won't be too much depreciation left to claim.
Better make it $85k.

How much IP value do I need to own outright?
To generate $85k at a 5% yield would be $1.7mill.

To own $1.7mill outright how much property ($) do I have to own before I start to sell IP's to clear out the debt so I am left with the $1.7mill?
Hmmm - if I'm purchasing on the way at 105% finance and I've got stamp duties to pay, previously deducted depreciation to add on and tax to pay - well maybe 2.3 times the outright amount. (I calculated this a year ago how and on what I can't recall. So please challenge it with your own ratio).
Answer $3.91 mill.

Now I know where I am now but what type of capital growth do I need to get there?

All I know is this:

To earn 2.33 the amount on an investment:
1 year left to retire Capital Growth required 133%
2 52.75%
3 32.64%
4 23.59%
5 18.47%
6 15.17%
7 12.87%
8 11.17%
9 9.87%
10 8.84%
11 8.01%
12 7.32%
13 6.73%
14 6.24%
15 5.81%

and this is net of inflation.

Am I on the right path?

I buy a two properties for $100k with 15 years to retire. Earning 5.81% they are finally worth $233k each.

House A Loan 105k Value 233k
House B Loan 105k Value 233k

I sell House B paying out House A and B's loan amount that will leave me with $23k to pay tax and the like.

For each house I bought in the proceeding years I needed to earn a higher yield.

If I had $1.7mill of properties today and they earned 5.81% then I could retire on a Gross Income of $85k.

As I don't have $1.7mill (I have $400k) then I better get crackin' buying some more!

There are probably many inaccuracies in the above and false assumptions.

That is why I throw the above open for discussion.

If you a serious about retiring on an IP income how do you plan to get there?

For those that say you can't guess a growth yield - you're right. But without using indicatives you have no plan.


Regards

Keen ;)
 
Good work, Keen.

I started with some fairly basic ideas and took at bit of a different approach. I wanted $100k p.a. indexed (rent rises would do that) and figured that after all expenses I'd be getting 5% of my equity plus cap growth on the portfolio value. In order to grow the portfolio as quickly as possible we'd revalue every year adn pull out equity up to the 80% mark so assume that the portfolio would be 20% equity and 80% borrowings (ie portfolio would be 5 times the size of equity).

So $100k/5% = $2m equity * 5 = $10 m portfolio = (then) around 20 houses.
Oh.

So I took the figures to Dr quiggles who said $100k? Don't you think we should shot for $300k? :eek:

Ah, well. If Think Big can win the Melbourne cup, maybe thinking big can win the rat race. :)
 
Keen said:
I'm keen to know how others have contructed a plan.

Despite being a wizard at Excel and putting vast numbers of scenarios together over the last few years I have no detailed financial plan of how to retire.

So MY plan is just a loose assortment of strategies kicking around in my head. Central to which is the accumulation of growth assets. I'm doing pretty good though, a lot of property under my belt now. Opportunities for exiting the rat race become more and more obvious each month. The longer I delay the more effective it will be.

What I'm saying is this, dont get hung up on the detailed plan at the expense of actually getting out there and acquiring growth assets. A mental collection of strategies and a (slightly more than) vague idea of how to go about it can be more than adequate.

Without a doubt one of the key things that stymied my growth a few years ago was the absolute idolatry that I adopted when reading the likes of John Burley, Robert Kiyosaki, Steve McKnight, rather than looking for a few nuggets of wisdom I was hung up on every vague concept and idea they expressed. My plan changed too often.

Pete recently posted a great quote in this thread that seeks to describe the idea that detailed planning is really no substitute for hard-core action (accumulation).

In the early stages of an investing 'career' you may not have the insight, experience or expertise to know how to turn the assets into cashflow. Don't get hung up on HOW to leverage the asset base to generate the day to day dollars that you will need for your life. Become comfortable with the FACT that if you have the asset base, your retirement WILL be assured.
 
Hi all.

Just a quick thought on the "living from equity" theme.

Once you've done your sums and built up your portfolio accordingly, will the bank/s let you keep on acquiring the built up equity year after year? I just wonder if it is that easy. Won't they (the banks) be a bit sceptical to keep on "giving out" money to someone a/ reliant on capital growth and b/ not having a "real" job. Please note, I am not trying to be negative here, because somewhere in the future I too intend on living from equity, just trying to learn how to set it all up.

Regards
Marty
 
duncan_m said:
So MY plan is just a loose assortment of strategies kicking around in my head. Central to which is the accumulation of growth assets. I'm doing pretty good though, a lot of property under my belt now. Opportunities for exiting the rat race become more and more obvious each month. The longer I delay the more effective it will be.
I'm with Dunc on this. I don't have a written down plan , though I could write one if I wanted. Problem is that I'm finding out new stuff all the time, so why commit myself to a plan when in six days or six months I might have found a better way to get there.

This is a problem with all of the " Off the Shelf " methods that are promoted here and else where. They lack flexibility. I have things I'm working on that will keep me busy over the next year, but I have no idea what opportunities will be available at the end of that period.

If, at this stage, I commit myself to my maximum comfort level to a long term strategy then I am less likely to be in a position to take advantage of the opportunities that will most certainly come along in the next few years.

See Change
 
Great post evrybody,

Good questions and great responses.

I like to dabble in spreadsheets 'like Duncan' and always seem to come to the same conclusion. The more IP's you can get under your belt (and still sleep at night) the better and 'sooner' your retirement will be.

I have spreadsheets that project cashflow, net worth and estimating retirement age & income for:-
1. doing nothing
2. buying 1 IP in the next 5 years
3. buying 2 IP's in the next 5 years
4. buying nn IP's over the next mm years

Conclusions:
1. Buy as many as you are comfortable with.
2. Learn techniques for managing risk so you can sleep at night
3. Analyse but don't over-analyse deals

Good luck on your planning
 
see_change said:
This is a problem with all of the " Off the Shelf " methods that are promoted here and else where. They lack flexibility. I have things I'm working on that will keep me busy over the next year, but I have no idea what opportunities will be available at the end of that period.

I'm with See Change on this you must be flexible. If the ball game changes and we get back to 10% yield as the norm for IP's I'm gunna buy a lot, should be able to get my 20 median priced houses easily. Until that happens I need a different plan of action to get my 20 median house equivalent.

So the current vague plan is 20 median priced houses, currently $250k each should return about $250 wk rent and I can then either sell 10 and own 10 or have enough cashflow to purchase annuities so I can live off equity.

Currently looking at ways to generate cashflow to continue to purchase more IP's, therefore shares and managed business's are on the radar.

No written down strategy but the wife and I talk about it and keep tweaking it so it is a defined strategy which we are working towards.

cheers
quoll
 
kissfan said:
Won't they (the banks) be a bit sceptical to keep on "giving out" money to someone a/ reliant on capital growth and b/ not having a "real" job.

Interesting post :)

Hi kissfan,

The idea is to house the equity in an income producing asset; so whenever equity is drawn down it might for example be placed in shares that DO produce income.

What the bank then sees is:
Assets (colateral) that give CG
Distributions and dividends that give income

What's a 'real ' job? :p

Regards,

Steve
 
duncan_m said:
Without a doubt one of the key things that stymied my growth a few years ago was the absolute idolatry that I adopted when reading the likes of John Burley, Robert Kiyosaki, Steve McKnight, rather than looking for a few nuggets of wisdom I was hung up on every vague concept and idea they expressed. My plan changed too often.

This is exactly what stopped me from progressing when I was first starting out - too much reading not enough action. Too many differing strategies that I never knew which one I was following - it changed from week to week.

My advice to people starting out these days to avoid this kind of problem is to just keep it simple at the start - just follow Jan's strategy (it's the easiest and simplest way to start) - and then when you want to get creative, the options will become a lot more apparent and you will understand them much more comprehensively once you have a few properties under your belt.

Even then, the point Dunc was trying to make is important - don't try and mimic the strategies of others - they only work once and for one person. You need to come up with your own strategies - they can be based on those of others, but it must be YOUR strategy and suit YOUR circumstances and the circumstances of the market you are in. Work on selecting those key nuggets of information from others that resonate with you and work them into your strategy. Focus on the discrete truths you learn and don't get caught up in the overall hype about one particular strategy.

In my case, it took a combination of Jan Somers, Peter Spann and Steve Navra strategies to find something I was comfortable with, and so now I have a plan to move forward with to the next stage. It's not exactly a retirement plan, but it's a solid foundation that I know will serve us well, and we're a fair way off wanting to retire yet anyway - the curse of enjoying what you do !
 
Steve Navra said:
Interesting post :)

Hi kissfan,

The idea is to house the equity in an income producing asset; so whenever equity is drawn down it might for example be placed in shares that DO produce income.

What the bank then sees is:
Assets (colateral) that give CG
Distributions and dividends that give income

What's a 'real ' job? :p

Regards,

Steve

Steve,

I'm not sure if this is what kissfan is referring to here, but I'm wondering if it is along the lines of 'the chicken and the egg'. Which one 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?

Perhaps this is an area you'd like to expand on and also how sometimes an 'intermediary' may be required to securitise part of the process etc.


:)
 
see_change said:
I'm with Dunc on this. I don't have a written down plan , though I could write one if I wanted. Problem is that I'm finding out new stuff all the time, so why commit myself to a plan when in six days or six months I might have found a better way to get there.

This is a problem with all of the " Off the Shelf " methods that are promoted here and else where. They lack flexibility. I have things I'm working on that will keep me busy over the next year, but I have no idea what opportunities will be available at the end of that period.

If, at this stage, I commit myself to my maximum comfort level to a long term strategy then I am less likely to be in a position to take advantage of the opportunities that will most certainly come along in the next few years.

See Change

Dunc & Seech

I think you've both got a plan but it's so simple you just don't realise it!

The plan is....drum roll please...




1) Buy assets which have capital growth potential, generate an income and can be used as collateral for borrowing
2) stir and repeat.

:D


I think most of us are so resistant to planning for the future (me included) because we think that plans are set in concrete once they're on the paper...and that will lock us out of unforseen opportunities...I guess the key is to make it a "living document" (which sounds like managementspeak doesn't it :rolleyes: )

Cheers
N.
 
keen said:

How much to retire on?


How much IP value do I need to own outright?
I believe residential IP is good for getting growth, however the yield is usually crap. So for building an asset base residential IP is great.

When I've got a reasonable asset base I can retire. But when I retire I need a good yield indexed to inflation - this means lower growth - I can't have both. Residential IP is NOT a good solution for retiring early, because of the low yield - I need higher yielding assets. LPTs yield 7-8%, bank shares currently yield 7-8% (inc franking).

I contend that if I had $1M of nett IP assets today I could retire on an index linked income of $60K. Sell the lot, pay $240K tax (assuming 50% CGT discount on top tax rate), invest the remaining $760K in LPTs or shares yielding 8%.

Other variations include -

  • borrow against these LPTs/shares with a margin loan to invest in more c/f neutral shares
  • borrow against PPOR & start investing in c/f neutral IP just like you did last time
  • don't sell the IPs, but draw down equity to invest in higher yielding assets
  • capitalise interest on margin loan & live off LPT income
  • buy tax-deferred LPTs & pay less tax on the income
The bottom lines are 'horses for courses' and 'look outside the IP square', 'use the right (financial) tool for the job'.

All this is ignoring the (possibly higher risk) 'living off equity' method of retiring.

None of this is advice.

KJ
 
NigelW said:
Dunc & Seech

I think you've both got a plan but it's so simple you just don't realise it!

The plan is....drum roll please...




1) Buy assets which have capital growth potential, generate an income and can be used as collateral for borrowing
2) stir and repeat.

:D


I think most of us are so resistant to planning for the future (me included) because we think that plans are set in concrete once they're on the paper...and that will lock us out of unforseen opportunities...I guess the key is to make it a "living document" (which sounds like managementspeak doesn't it :rolleyes: )

Cheers
N.


I agree with Nigel.

Most of us are in the asset acquisition stage. While gainfully employed you should be focussed on multiplying your portfolio and once compounding kicks in you will be surprised at the rate of progress.

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

The strategy will be based on tax laws and economic conditions at the time

The ideas I have now involve property development, commercial and industrial real estate, covered put and calls businesses. So for me property investing is a vehicle that will allow me to safely embark on other more exciting projects later.

Regards

Sailesh
 
Keen,

You've started a great thread. Thanks.

Am in the "living document" camp at the moment but maybe a bit more planning wouldn't go astray.

A86
 
Awesome thread Keen,

There are as many strategies as there are forumites but one that really got me thinking is one Rixter posted a few weeks back. A few that have posted in this thread have similar ideas. Its just a matter of tweaking it to suit your individual circumstances.

I liked it so much i printed it off and passed it around at the office.

I've copied and pasted it incase you missed it.

Thanks again Rixter.

Cheers :)

Rixter said:
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 :D
 
Retirement

Hi Keen

Your assumption "Now I know where I am now but what type of capital growth do I need to get there?"

Why are you so sure that there will be capital growth to support your retirement? Don’t assume that the property never decreases in value, it does!
I'm not saying that it will not increase in the next 15 years, but to assume that it will increase above certain growth % is gambling in my mind. Also, in regards to the property "cycles", I know other countries which do not know the term "cycle" in property, so Australia is very specific in those terms... or is it?

keithj wrote "Residential IP is NOT a good solution for retiring early, because of the low yield" and "The bottom lines are 'horses for courses' and 'look outside the IP square', 'use the right (financial) tool for the job'"

Spot on in my mind. That being said, ... your kids may be able to retire early if you leave them enough property fully paid off :)

My strategy includes more then just residential property.
It is combination of IP's, commercial property, cash and shares.
All of the property is paid off and is earning money. Cash is earning money, so are shares. If you are into shares, you may combine CG shares (blue chip) for dividend, with some swift/day trading for short term profits.
All of it is backed up by Risk management, different for different investment areas.

I also agree with the general consensus that you need to start working on your retirement, which is more important then getting mixed up in different strategies and tools. Once you are on your way, you will design your own unique retirement strategy in which you will have your retirement plan and risk management etc.

Thx
V
 
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 said:
Awesome thread Keen,

There are as many strategies as there are forumites but one that really got me thinking is one Rixter posted a few weeks back. A few that have posted in this thread have similar ideas. Its just a matter of tweaking it to suit your individual circumstances.

I liked it so much i printed it off and passed it around at the office.

I've copied and pasted it incase you missed it.


Thanks again Rixter.

Cheers :)

SOS, thanks for bringing Rixter past post to light for those who haven't seen it. And RIXTER, WOW, thanks for that post, it is a great read. I have always known that i want IP's to fund my retirement but i didn't know the full mechanics of it until now :D

GG
 
NigelW said:
Dunc & Seech

I think you've both got a plan but it's so simple you just don't realise it!

The plan is....drum roll please...




1) Buy assets which have capital growth potential, generate an income and can be used as collateral for borrowing
2) stir and repeat.

:D


I think most of us are so resistant to planning for the future (me included) because we think that plans are set in concrete once they're on the paper...and that will lock us out of unforseen opportunities...I guess the key is to make it a "living document" (which sounds like managementspeak doesn't it :rolleyes: )

Cheers
N.

Sorry Nigel , not quite that simple. I'm happy to sell properties (and have done so recently ) if I think I can make better use of the money in the mean time while I wait for the next cycle.

See Change
 
see_change said:
Sorry Nigel , not quite that simple. I'm happy to sell properties (and have done so recently ) if I think I can make better use of the money in the mean time while I wait for the next cycle.

See Change

Okay

1) Buy and sell assets which have capital growth potential, generate an income and can be used as collateral for borrowing based on your view of where the best returns will be
2) stir and repeat. ;)


Maybe it's semantics...let's not call it a plan but instead call it a set of "guiding principles"...you know "doodad debt bad, investment debt good..." etc :D

Cheers
N
 
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