Growing a large portfolio, planning to retire and reducing debt

[younguns]

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

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

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

rolf

Thanks Rolf. I will have a chat with our mortgage broker about the debt recycling. And the former PPOR is the only property that's in both of our names. And it is about 90% geared. Your the third person to recommend speaking with Dazz and I just want to thank everyone very much for their recommendations and view points.

Thanks again

 

[sash]

Hi Youngguns,

It is great that you have some ambitious plans.

However, given the yield on your properties....you will run out of serviceability well before you attain more than a couple more properties.

Also having just 15 properties which will be worth in $18.9m is a big ask. It can be done....but you would have to be spot on every investment you make.

Bank on a growth rate of 7% for properties under 600k.....properties over 600k are likely to grow at less than 5% due to affordability.

As piston broke points out you will need $4-$5 net to clear 200k per year income.

You point out that your husband has a income of $350k per annum gross (I taking that this is not a package)....on this income you are left with 210k...nice income but in the context of serviveability not a lot of income. It could probably service $3m....but it gets harder.

I would chunk down your expectation to say hit $5m in 5 years and then work on $10m in 10 year.

I started my journey on a slow and stedy way over years ago...I really only ramped up about 5 years ago. Since then I have quadupled my gross assets and have mutipled my net worth 5 times. This has not been easy.

Also, you will need to look outside of your state...the state with the most potential is NSW....particularly Sydney's Western suburbs.

Good luck in your journey.

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?

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]

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

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.

Thanks Trogdor. This is precisely what we don't want to happen. All this work and sacrifice to be stuck with a huge debt and no light at the end of the tunnel.

Is this a strategy that is working for you at the moment? Do you have a balance of residential, commercial and blue chip shares?

The CIP is definitely something we will look into. And we will ask the financial planner we have a meeting with in two weeks about the bluechip shares. I suppose we have always just believed we could work hard, grow a large property portfolio and everything would work out well. You would think when your income increases you would have less to worry about. It's precisely the opposite for us. I have never thought about money and the right financial decisions more than now..

Thanks again

 

[Trogdor]

Thanks Trogdor. This is precisely what we don't want to happen. All this work and sacrifice to be stuck with a huge debt and no light at the end of the tunnel.

Is this a strategy that is working for you at the moment? Do you have a balance of residential, commercial and blue chip shares?

The CIP is definitely something we will look into. And we will ask the financial planner we have a meeting with in two weeks about the bluechip shares. I suppose we have always just believed we could work hard, grow a large property portfolio and everything would work out well. You would think when your income increases you would have less to worry about. It's precisely the opposite for us. I have never thought about money and the right financial decisions more than now..

Thanks again

Yes, exactly. We have PPOR, 1 resi IP, and 2 commercial IPs. Also a reasonable amount of shares. I have posted a few threads on the commercial IP journey - have a search if you are interested.

Total portfolio is a bit (but not hugely) bigger than yours in value. Value of CIPs are around 50% of total holdings.

In future only resi we will buy would be a nicer PPOR (well down the track). Long term focus in on additional CIP / adding to the equities portfolio. Short term focus is building up the offsets.

As we have no need to accumulate too aggressively now (if our debt was paid off we could comfortably live off the rent and dividends) its more a matter of sending a few years "bullet proofing" our position through offsets before moving forwards. We're actually the same ages as you guys, so a long time left to pay down debt... Boring but will get us there.

 

[Qlds007]

Hate to say i disagree that it can't be done with Residential property.

Have a look at Octobers 10 API magasine and you can read my story.

I arrived in Australia at the age of 28 from the UK and we managed to call it a day sub 40.

My current lvr is around 11% of a $18M + portfolio.

 

[The Y-man]

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

Ok, sorry another bit of info I need: what is the absolute rock bottom minimum you can live on right now? (specify if net of interest payments and rent are included or not pls)

The Y-man

 

[murph14]

Uh don't feel distressed. Let's put things in to perspective.

Even buying 1 IP a year outright, say $250k going in to a western Sydney unit. That's $350pw. Times by 5 years and that's $1750pw cash flow for IPs owned outright! That's not even factoring in CG or rental increases.

So $91k gross pa is the worst case scenario no risk option. Still a superb outcome. Many people work their butt off 40 hours a week a year to earn that much. You and your hubby won't have to lift a finger.

But no, don't do that. Leverage to a point appropriate to your risk profile. The $200k net pa may have to wait a couple more years after 40 but retirement would be easy and it will be the brightest light you've ever seen.

 

[BuildingBlocks]

Even buying 1 IP a year outright, say $250k going in to a western Sydney unit. That's $350pw. Times by 5 years and that's $1750pw cash flow for IPs owned outright! That's not even factoring in CG or rental increases.

Can you explain the maths behind this one?

Take home pay on 350k is around 200k before they pay all of their expenses. Savings left to invest at this stage would be between 5-10k month, under half of what would be needed to buy outright each year.

 

[BuildingBlocks]

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

June is only a month and a few days away

 

[murph14]

Ah that's right, the government absolutely dominates the rich don't they. Maybe they should consider a trust.

 

[younguns]

Ok, sorry another bit of info I need: what is the absolute rock bottom minimum you can live on right now? (specify if net of interest payments and rent are included or not pls)

The Y-man

Don't be sorry I'm still learning what info I need to tell people and the right questions to ask I'm afraid. We have worked out our living expenses are approx 100K per annum not including mortgage repayments etc. Once we settle on our new PPOR, unless we can find some way of paying less tax, we will have approx 4,000 surplus cash a month. Let me know if you need to know anything else. Thanks again.

 

[younguns]

Hi Youngguns,

It is great that you have some ambitious plans.

However, given the yield on your properties....you will run out of serviceability well before you attain more than a couple more properties.

Also having just 15 properties which will be worth in $18.9m is a big ask. It can be done....but you would have to be spot on every investment you make.

Bank on a growth rate of 7% for properties under 600k.....properties over 600k are likely to grow at less than 5% due to affordability.

As piston broke points out you will need $4-$5 net to clear 200k per year income.

You point out that your husband has a income of $350k per annum gross (I taking that this is not a package)....on this income you are left with 210k...nice income but in the context of serviveability not a lot of income. It could probably service $3m....but it gets harder.

I would chunk down your expectation to say hit $5m in 5 years and then work on $10m in 10 year.

I started my journey on a slow and stedy way over years ago...I really only ramped up about 5 years ago. Since then I have quadupled my gross assets and have mutipled my net worth 5 times. This has not been easy.

Also, you will need to look outside of your state...the state with the most potential is NSW....particularly Sydney's Western suburbs.

Good luck in your journey.

Thanks for the advice Sash. I think we need to do a whole lot more planning and discussing and work out what a realistic goal is for us to work towards. The figures I mentioned above were put together by our buyers agent who has factored in approx 8% annual return on each of the investment properties over a 10 year period. We have never been very good and slow and steady - perhaps that's our problem

 

[younguns]

Hate to say i disagree that it can't be done with Residential property.

Have a look at Octobers 10 API magasine and you can read my story.

I arrived in Australia at the age of 28 from the UK and we managed to call it a day sub 40.

My current lvr is around 11% of a $18M + portfolio.

I will definitely dig out my copy. That's amazing - congratulations!!

 

[younguns]

Ah that's right, the government absolutely dominates the rich don't they. Maybe they should consider a trust.

Tell me about it! We actually have a discretionary family trust set up with a corporate trustee. Unfortunately because my hubby is now working for just the one company he is now treated as an employee and we don't satisfy the ATO's PSI rules so all income is attributed to him and can't be distributed to myself or the family. And we have to pay over $8,000 per month to the ATO to satisfy the PAYG requirements!!

 

[younguns]

June is only a month and a few days away

I know I can't wait! We have had to wait 12 months to get to the two year business financials stage. That's why we had to negotiate a longer settlement (sept 30) on our new PPOR. The only thing I'm slightly concerned about is how much the bank will be willing to lend once we go over the $2 mil mark in borrowings. In an ideal world we will be able to settle on the new PPOR and buy another IP this year. Then hopefully get the new PPOR re valued after the reno next year and get at least 1 more IP. Fingers crossed

 

[The Y-man]

We have worked out our living expenses are approx 100K per annum not including mortgage repayments etc...

Whooaaa...... that's one mighty living cost.... going to make achieving your plans a bit difficult in the time frame.

Any plans for you to work once hubby goes half-time? (just throwing ideas around)

The Y-man

 

[younguns]

Whooaaa...... that's one mighty living cost.... going to make achieving your plans a bit difficult in the time frame.

Any plans for you to work once hubby goes half-time? (just throwing ideas around)

The Y-man

I know! I couldn't quite believe it myself when I added it all up the other day. Cars, private health, food, insurances, kids stuff, presents, business expenses, phone, bills, entertainment etc etc all really ads up!!

I'm actually going to start doing a bit of freelance work in the next few months. Approx $40K per annum I hope and then I'll see how things go over the next few years. My primary role at the moment is to manage our life, including our investments, while he is away. I would think we could probably get the living expenses down to 85K but that would be the minimum. With hubby being away so much things like gardening, cleaning and babysitting become rather expensive additions to the budget...

 

[BuildingBlocks]

I know! I couldn't quite believe it myself when I added it all up the other day. Cars, private health, food, insurances, kids stuff, presents, business expenses, phone, bills, entertainment etc etc all really ads up!!

I'm actually going to start doing a bit of freelance work in the next few months. Approx $40K per annum I hope and then I'll see how things go over the next few years. My primary role at the moment is to manage our life, including our investments, while he is away. I would think we could probably get the living expenses down to 85K but that would be the minimum. With hubby being away so much things like gardening, cleaning and babysitting become rather expensive additions to the budget...

Please don't take offence at the following, as I don't know your circumstances and you are merely another person posting on the internet

$350k before tax is great money, let's say it is $210k after tax. But spending even $85k on expenses ($7000/month) before covering your mortgage is extremely high and quickly eats away at the income.

If you aren't currently working then do you need the babysitter, gardener and cleaner?

If you want to make the big goals then along with them comes sacrifices and the first should be to look at what you can cut back on to stop the income flowing out almost as quickly as it is coming in.

Although the large income may help you with obtaining finance, you aren't really saving much more than others on half the income.

This will become even a greater issue in 5yrs time when your pre-tax income drops to $200k. Your savings then will be basically nothing, or with your negatively geared properties and high expenses you may even be in trouble.

On a side note, I am sure it has been thought about already, but make sure that you have some sort of income protection insurance.

You have the opportunity right now to make the big income work for you

 

[younguns]

Please don't take offence at the following, as I don't know your circumstances and you are merely another person posting on the internet

$350k before tax is great money, let's say it is $210k after tax. But spending even $85k on expenses ($7000/month) before covering your mortgage is extremely high and quickly eats away at the income.

If you aren't currently working then do you need the babysitter, gardener and cleaner?

If you want to make the big goals then along with them comes sacrifices and the first should be to look at what you can cut back on to stop the income flowing out almost as quickly as it is coming in.

Although the large income may help you with obtaining finance, you aren't really saving much more than others on half the income.

This will become even a greater issue in 5yrs time when your pre-tax income drops to $200k. Your savings then will be basically nothing, or with your negatively geared properties and high expenses you may even be in trouble.

On a side note, I am sure it has been thought about already, but make sure that you have some sort of income protection insurance.

You have the opportunity right now to make the big income work for you

You make a very valid point BuildingBlocks and i agree with you. I just re- read my post and realised I very much sounded like one of those 'ladies that lunch'!

Unfortunately we don't have much support from family etc so with hubby away, and two little ones under 3, I either have to do everything myself or pay for someone else to. My handy women skills are coming along but I still have a long way to go

I've actually been doing a property investment course one night a month so thats where the babysitter comes in - in that case I think it's money well spent.

Having said that, we are looking at ways to really cut back at the moment. It's surprising how quickly your living costs increase when the income does!

And we do need to increase our income protection insurance asap so thanks for the reminder

 

[Ed Barton]

You make a very valid point BuildingBlocks and i agree with you. I just re- read my post and realised I very much sounded like one of those 'ladies that lunch'!

Unfortunately we don't have much support from family etc so with hubby away, and two little ones under 3, I either have to do everything myself or pay for someone else to. My handy women skills are coming along but I still have a long way to go

I've actually been doing a property investment course one night a month so thats where the babysitter comes in - in that case I think it's money well spent.

Having said that, we are looking at ways to really cut back at the moment. It's surprising how quickly your living costs increase when the income does!

And we do need to increase our income protection insurance asap so thanks for the reminder

make hay while the sun shines, or whatever they say. seeing as you want hubby to do some developments look for development sites when buying. even if it's just a split.

the WA is going no where in a hurry, and back according to others. there's no rush.

go visit everything that is for sale and play the 'dumb' wife.