Growing a large portfolio, planning to retire and reducing debt

[younguns]

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.

Thanks Ed. We do hope to add a couple of potential development sites to the portfolio over the next two years and I expect I'll be visiting allot of them. I think I visited close to 80 properties with both children when searching for our latest purchase (PPOR) and all of the realestate agents, and owners I might add, just loved that a "nice young family" were interested in their home

 

[murph14]

Unfortunately it's all about taking a lifestyle hit. I would do a complete overhaul of the budget. As they say, short term pain for long term gain. Bring on the frugality.

If you really want this to happen sooner rather than later, then renting out the new PPOR is the first step. Claiming the neg. gearing on it will leave you substantially better off. Do the reno first though. Build the equity. Spend some time there. Make it worthwhile at least. Looks like you can rent a similar sized house in your suburb for $500pw. $3k a month saved and about $7k pa in tax (or something)!

 

[Dazz]

Agreed Murph.

 

[younguns]

Unfortunately it's all about taking a lifestyle hit. I would do a complete overhaul of the budget. As they say, short term pain for long term gain. Bring on the frugality.

If you really want this to happen sooner rather than later, then renting out the new PPOR is the first step. Claiming the neg. gearing on it will leave you substantially better off. Do the reno first though. Build the equity. Spend some time there. Make it worthwhile at least. Looks like you can rent a similar sized house in your suburb for $500pw. $3k a month saved and about $7k pa in tax (or something)!

Good idea Murph. We discussed this today actually. We will do the work, move in for 12 months to get the PPOR CGT exemption and then rent it out. We should get at least 650 per week once the work is done.

And, budget overhaul is our top priority this weekend. Bring it on

 

[kum yin lau]

Hi, as others have pointed out, there are many things you can do.

I'll emphasize one point: it looks like your deductible loans are not enough.

You have roughly 1.2M deductible. At 7% interest, you're likely to get about 50 thousand -ve gearing against income of $350K

Way too much PAYG

You know of course that what we can yak about on this forum is just our opinions. Whatever decisions you make, the onus is on you to find out what the risk/reward factors are.

Provided the income remains at the same level & isn't subject to quick changes, I'll say your borrowing can be increased.

Get rid of the PPOR /consumption/ undeductible borrowing in whatever way you can as FAST as you can.

KY

 

[sash]

Spot on Kum.....YoungGuns...debt levels are to a point....their credit will be turned off shortly unless expenses reduced and yields are increased substantially. As for Commercial property....forget about that till you have a 30% deposit and your LVR in resi well under 70%...banks will not take you on.

Let just look at the numbers assuming you rent your PPOR:
Total Loans about $2m assuming 7% I/0 = IR expense of $140k
Expense (rates, insurance, mgnt) = $6000 per property x 4 props = $24
Rents are $96k

So your short fall is $68k per annum without depreciation.

On $350k you are left with about $213k.

So after taking out the $85k (living expenses) and $68k you are left with about $60k left over....pretty good but be consumed quicky with another 3 pruchases unless they are high yielding properties.

The other issue you face is that you are about 85% portfolio....given the current Credit Laws this will be an issue as the back needs to consider the risk of you overcommitting. This will affect borrowing capacity....maybe not immediately. The other thing to consider is what happens if your husband gets ill or loses their job. How much of a buffer do you have to continue to pay 13k per month?? Note I have not included depreciation...it does give you some artificial cash back buy not good if you have no income.

The biggest issue is how you build a portfolio which is sustainable...in the current scheme of things...me thinks it is not sustainable over the longer term if the current status of expansion is maintainde despite the large income.

Hi, as others have pointed out, there are many things you can do.

I'll emphasize one point: it looks like your deductible loans are not enough.

You have roughly 1.2M deductible. At 7% interest, you're likely to get about 50 thousand -ve gearing against income of $350K

Way too much PAYG

You know of course that what we can yak about on this forum is just our opinions. Whatever decisions you make, the onus is on you to find out what the risk/reward factors are.

Provided the income remains at the same level & isn't subject to quick changes, I'll say your borrowing can be increased.

Get rid of the PPOR /consumption/ undeductible borrowing in whatever way you can as FAST as you can.

KY

 

[younguns]

Spot on Kum.....YoungGuns...debt levels are to a point....their credit will be turned off shortly unless expenses reduced and yields are increased substantially. As for Commercial property....forget about that till you have a 30% deposit and your LVR in resi well under 70%...banks will not take you on.

Let just look at the numbers assuming you rent your PPOR:
Total Loans about $2m assuming 7% I/0 = IR expense of $140k
Expense (rates, insurance, mgnt) = $6000 per property x 4 props = $24
Rents are $96k

So your short fall is $68k per annum without depreciation.

On $350k you are left with about $213k.

So after taking out the $85k (living expenses) and $68k you are left with about $60k left over....pretty good but be consumed quicky with another 3 pruchases unless they are high yielding properties.

The other issue you face is that you are about 85% portfolio....given the current Credit Laws this will be an issue as the back needs to consider the risk of you overcommitting. This will affect borrowing capacity....maybe not immediately. The other thing to consider is what happens if your husband gets ill or loses their job. How much of a buffer do you have to continue to pay 13k per month?? Note I have not included depreciation...it does give you some artificial cash back buy not good if you have no income.

The biggest issue is how you build a portfolio which is sustainable...in the current scheme of things...me thinks it is not sustainable over the longer term if the current status of expansion is maintainde despite the large income.

Thanks for the comments Kum and Sash. So just to clarify, we should be paying down as much of the non deductible debt as soon as we can while also increasing our deductible debt? May I ask what you would do in our situation? Obviously we could spend the next 2-3 years paying off as much of our PPOR, car debt etc however this would mean not increasing our portfolio at the same time...

We were doing some research into commercial over the weekend and are VERY interested in adding a commercial property to our portfolio to help with cash flow. Would you hold off on getting any other Resi IPs, save and get LVR down to put us in a good position for a CIP?

Thanks again
younguns

 

[sash]

Stalling for 2-3 years to pay down debt whilst prudent maybe unecessary.

Have you considered renting out your PPOR on completion of renovations and then moving to cheaper property - i.e $450pw?

With the extra cashflow you can invest in more residential properties. I would stick to growth areas under $350k as these offer the best yields. You might have to consider interstate properties as NSW offers some of the best growth potential.

CIP is no a reasonable proposition as anything worth investing will cost $1-3m. You will also need a 25-30 desposit....which means you will need 250-900 deposit. A possibility down the track....but in my opinion not viable at the moment.

Thanks for the comments Kum and Sash. So just to clarify, we should be paying down as much of the non deductible debt as soon as we can while also increasing our deductible debt? May I ask what you would do in our situation? Obviously we could spend the next 2-3 years paying off as much of our PPOR, car debt etc however this would mean not increasing our portfolio at the same time...

We were doing some research into commercial over the weekend and are VERY interested in adding a commercial property to our portfolio to help with cash flow. Would you hold off on getting any other Resi IPs, save and get LVR down to put us in a good position for a CIP?

Thanks again
younguns

 

[younguns]

Stalling for 2-3 years to pay down debt whilst prudent maybe unecessary.

Have you considered renting out your PPOR on completion of renovations and then moving to cheaper property - i.e $450pw?

With the extra cashflow you can invest in more residential properties. I would stick to growth areas under $350k as these offer the best yields. You might have to consider interstate properties as NSW offers some of the best growth potential.

CIP is no a reasonable proposition as anything worth investing will cost $1-3m. You will also need a 25-30 desposit....which means you will need 250-900 deposit. A possibility down the track....but in my opinion not viable at the moment.

Hi Sash,

Yes we are considering renting out the new place once we have done the work and lived there for 12 months to get the PPOR capital gains exemption.

We will be lucky to rent anything under $550 per week in Duncraig but I work from home so we should be able to claim a portion of this back which will help a little. Still worth doing though I think as P+1 will be 4,500 per month v rental of 2,200...

I take on board your point about NSW. There are very few 'growth areas' in Perth where you can get something with a decent land value for under $350K!

And regarding commercial. I think we will keep this on the agenda and assess our position once we have completed the work on the new PPOR/investment property.

Thanks again for the advice

 

[kum yin lau]

Hi, you might want to investigate the pros and cons of relinquishing the PPOR status vs the investment property status.

Say you renovate / asap get the house up for rental & claim depreciation / -ve gearing [interest costs would be substantial], and rent a place at about the same cost.

Rent = $500 pw = 26K p.a.

rent received = 26K p.a. less costs = $20K p.a. [ insurance, rates, water etc etc] now ALL become deductible at let's say 40% = $2400

Let's say depreciation of $5K, there's another $2K

If you're clever, you the landlord provide the whitegoods [big depreciation], the soft furnishings etc for a better rental.

Then, 5 years down the track, you move back into the house, AFTER you have claimed the expenses. The marble cooktop should not be in such bad condition after all.

Do you know about the 6 or 7 year rule?

KY

 

[younguns]

Hi, you might want to investigate the pros and cons of relinquishing the PPOR status vs the investment property status.

Say you renovate / asap get the house up for rental & claim depreciation / -ve gearing [interest costs would be substantial], and rent a place at about the same cost.

Rent = $500 pw = 26K p.a.

rent received = 26K p.a. less costs = $20K p.a. [ insurance, rates, water etc etc] now ALL become deductible at let's say 40% = $2400

Let's say depreciation of $5K, there's another $2K

If you're clever, you the landlord provide the whitegoods [big depreciation], the soft furnishings etc for a better rental.

Then, 5 years down the track, you move back into the house, AFTER you have claimed the expenses. The marble cooktop should not be in such bad condition after all.

Do you know about the 6 or 7 year rule?

KY

Hi KY. Yes I'm aware of the 6 year rule. I wasn't aware about the 7 year one. If we were to relinquish the PPOR status we would have to be pretty sure we were not going to sell. If for any reason we decided we wanted to sell and we didn't have the PPOR exemption my hubby's income would mean a rather hefty tax bill. I take on board your point though and we will crunch the numbers. Good idea with the white goods

 

[younguns]

Hi all,

Just a small update. We have gone through our budget with a fine tooth comb and to put it simply, we are being far to generous! So it's back to being frugal!!

We are also scaling our plans for the new PPOR back to ensure it will make a good rental, as well as generate as much equity as possible for as little outlay as we can get away with.

We are still deciding if we will even move into the property (that's a question for our accountant). I was even thinking today about making it an executive rental - i.e fully furnished and attracting the 'mining migrants' that arrive in perth each year and need a place to settle until they decide where they want to buy/rent etc. Is this a silly idea?? When I was looking for a place for us to rent I noticed there are hardly any modernised 4 x 2 properties available for rent in Duncraig (which is a popular family suburb because of its good schools and proximity to the ocean and city). Perhaps these people are also have the same problem getting a 'nice' rental?

Thanks again
Younguns

 

[landlubber]

Frugal is good !

So it's back to being frugal!!

Having just read your thread Youngun, I'm very pleased to hear this. Its' a start, but only a start. Because from what I have read you really need to examine the path you're on if you're serious. You have bugger all equity in your flock; your cost of living for 2 parents + 2 young kids is exhorbitant (sorry, if you're "at home" you don't NEED a gardener or a cleaner....do it yourself.); your hubby is earning "big bucks" BUT you're paying a huge % of it to the ATO (YOUR MAIN ENEMY IN WEALTH CREATION); your recent purchase of a 5 bed 2 bath home is a further indication that you're "addicted to the high income" and you're thinking "want" not "need" (We happily lived with four small children in a three bed house.) Your current choice of IPs is "very vanilla" which is NOT how you accelerate in this game. You need to be able to identify IPs/areas/towns with potential ( reno/develop/rezone/subdivide).

Now I put my grand-dad's hat on. You're kids are only young ONCE. You're now 28 and you're only young ONCE. Don't kid yourself you're retiring at 40 for time with the kids. In twelve years they will be teenagers. Most likely, they won't want to know you. Factor into your plans their NOW years. Especially for your hard working husband.

Now my "retirees" hat. Stop thinking "retire at 40". That's BS and way too young. Rethink your plan. You could live to 100. What are going to do for 60 years...sit on the beach??
LL
PS Take advantage of Dazz's kind offer. You're not ready yet. But he'll show you how to get there and he's one of the best. (Only trouble is he knows it.)

 

[Dazz]

.....my ears were burning LL, it boils down to "know thyself".

If I had to choose between Nelson Mandela's wise words and the tall poppy cutters from Australia....give me Nelson everytime baby....

There is no passion to be found playing small - in settling for a life that is less than the one you are capable of living.

 

[Terryw]

YG,

I have some comments:

1. There is no requirement to live in your main residence for 12 months before you can rent it out and still claim main residence status. There is no time period in the legislation, so as long as you can justify it being your main residence you should be right. Check with your tax advisor on how to do this.

2. You are creating a tax time bomb by buying all properties in your husband's name. This allows not flexibility. There is also the asset protection side of it too.

3. Your husband is paying a huge amount of tax and this needs to be reduced as much as possible. You need a creative tax advisor to work out ways. eg. you may be able to be employed by him somehow. maybe you could set up a gardening/cleaning/book keeping company to do your familiy properties etc. This can help divert income to yourself and save tax.

4. You haven't mentioned super, but I guess you don't want to wait till your in your 60s to enjoy it.

I like the idea of you renting and claiming your negative gearing on the properties. Even better if you can claim part of the rent for your work. You could still have the property CGT free and you could claim the one you live in now as the main residence or the new one - choose whicheve has the highest growth potential. Or move into the new one an then out again. You will then have the choice of which one to claim down the track.


Even if there is a shortfall which cannot be claimed look at using discretionary trusts. Do the sums as it may work out very effective in the long run.

 

[younguns]

Hi Terry,

Thanks for the suggestions. I have just spoken with our accountant about the main residence exemption and not having to move in. He is looking in to it and getting back to me.

This financial year I will be employed by my husband as his communications advisor and administrator. Next year will be a different matter as he won't meet the PSI rules so your idea of setting up the cleaning and book keeping business is a good one. Does it matter that two of the properties are in a different state to us?

I take on board your point about the tax issues. This is what our accountant has been concerned about. I spoke with him today about using our discretionary trust to purchase future investment properties. He said that when we are considering our next property purchase we need to sit down and run the numbers and look at our options. His main concern is if we plan to hold a negatively geared property for a long time within the trust we may get into trouble with the quarantined losses and it will affect our cash flow.

The new place we have put into my husband's name so we can make the most of the PPOR exemption. The two melb properties are in his name as they are negatively geared and the place that is currently our PPOR, but will become our inv property, is in both our names. Do you have any advice as to how we could structure things better going forward?

Regarding the asset protection side of things. He really is just consulting to one company now and is pretty much being treated as an employee. So we are not too concerned about asset protection at this stage but I know it will become an issue in the future.

We discussed socking some cash into our super so that we can establish a self managed super fund to purchase properties within but as you said, we don't want to have to wait to 60 to access this money. We like the flexibility of being able to access our funds when and if we may need to.

We are on a steep learning curve with all of this, particularly because hubby has only really been earning his current salary for 12 months! Any advice you have would be greatly appreciated.

Thanks again
YG


[/QUOTE]

 

[Dazz]

our accountant's main concern is if we plan to hold a negatively geared property for a long time within the trust we may get into trouble...it will affect our cash flow....Do you have any advice as to how we could structure things better going forward?

Stop buying negatively geared properties

 

[Terryw]

Hi Terry,

Thanks for the suggestions. I have just spoken with our accountant about the main residence exemption and not having to move in. He is looking in to it and getting back to me.

This financial year I will be employed by my husband as his communications advisor and administrator. Next year will be a different matter as he won't meet the PSI rules so your idea of setting up the cleaning and book keeping business is a good one. Does it matter that two of the properties are in a different state to us?

I take on board your point about the tax issues. This is what our accountant has been concerned about. I spoke with him today about using our discretionary trust to purchase future investment properties. He said that when we are considering our next property purchase we need to sit down and run the numbers and look at our options. His main concern is if we plan to hold a negatively geared property for a long time within the trust we may get into trouble with the quarantined losses and it will affect our cash flow.

The new place we have put into my husband's name so we can make the most of the PPOR exemption. The two melb properties are in his name as they are negatively geared and the place that is currently our PPOR, but will become our inv property, is in both our names. Do you have any advice as to how we could structure things better going forward?

Regarding the asset protection side of things. He really is just consulting to one company now and is pretty much being treated as an employee. So we are not too concerned about asset protection at this stage but I know it will become an issue in the future.

We discussed socking some cash into our super so that we can establish a self managed super fund to purchase properties within but as you said, we don't want to have to wait to 60 to access this money. We like the flexibility of being able to access our funds when and if we may need to.

We are on a steep learning curve with all of this, particularly because hubby has only really been earning his current salary for 12 months! Any advice you have would be greatly appreciated.

Thanks again
YG

[/QUOTE]

Hi YG

You do have to move into a house before you can claim it as your main residence, but there is no minimum time that you must be there. Many factors will be taken into account when determining this, and it may be that just being there 1 month would be enough.

My ideas about the cleaning/gardening were just to try and get you thinking. It wouldn't really work with the 2 properties interstate - unless you subcontracted the work out maybe.

You should possibly look at doing you work thru a company or trust. This could also help later when you buy property in a trust (a separate one for asset protection) by helping to channel income into the trust suffereing from a loss.

You may also be able to save up some money and then gift it to the trust, the non trading one, with the trust lending it back to you interest free, or a low interest. You would need a good plan with this and need to consider the tax aspects too. This would provide a bit of asset protection, but would not be 100% safe.

There are an infinite number of reasons why an individual could get sued, other than for work related reasons. Having everything with your husband could be very dangerous if something were to happen.

Also make sure you both set up wills, and testamentary trusts within the wills. Life insurance is a good idea too.

 

[younguns]

Hi LL

Thanks for the straight shooting response. You raise some very valid points.

You have bugger all equity in your flock...your current choice of IPs is "very vanilla" which is NOT how you accelerate in this game

I realise we have perhaps not made the right investment choices so far. I suppose we just wanted to get on the property ladder asap and didn't really take too much time to educate ourselves beforehand. We have since learnt allot and done lots of reading and I'm currently doing a property investors course. Our strategy is now to find properties in high growth areas, add value i.e. reno/develop/rezone/subdivide and hold for the long term where possible. We would like to add a commercial property or two into the mix as well (especially after reading some of Dazz's fine work!) and try our hand at development once we have enough equity/cash to play with.

your recent purchase of a 5 bed 2 bath home is a further indication that you're "addicted to the high income" and you're thinking "want" not "need" (We happily lived with four small children in a three bed house

I agree with you here. However we did buy this property with our other criteria in mind. It is in a high growth area, with good schools and strong rental demand. It is also an ugly duckling and once we have completed the reno we should make a conservative profit/equity gain of $60K. We plan to remortgage and use this money + the reno money we originally put in to fund our next purchase. Thanks to some great advice from other SS members we are also going to rent it out now and rent somewhere ourselves. This should save us $2,000 per month!

We have also asked ourselves allot of hard questions these last few weeks and will be selling my hubby's car (his pride and joy!) because it is financed and sits in the garage! This will give us an extra $25K a year in disposable income These decisions are all thanks to people being rather frank with us so thanks everyone.

Now I put my grand-dad's hat on. You're kids are only young ONCE. You're now 28 and you're only young ONCE. Don't kid yourself you're retiring at 40 for time with the kids. In twelve years they will be teenagers. Most likely, they won't want to know you. Factor into your plans their NOW years. Especially for your hard working husband.

Now my "retirees" hat. Stop thinking "retire at 40". That's BS and way too young. Rethink your plan. You could live to 100. What are going to do for 60 years...sit on the beach??

When I say retiring, I don't think we will ever retire. We would just like to be in the position where finances are no longer a concern any more in 9 years time. We are both far too energetic to stay on the beach

The kids are our biggest concern with all of this. Hubby used to earn 120K a year. Now it is closer to $350K! We made the decision that if he could do this for 5 years (4 years now) and then take a perth-based role after that (approx 200K per annum) we would be in a much better position than just scraping by like we were before for the next 20 years with him working 12 hour days and not seeing the kids during the week anyway.

Our kids would then be 5 and 8 and hopefully still want us around! We may change our mind but for now we see this as a necessary sacrifice for long term gain.

Looking forward to your response.

YG

 

[younguns]

Stop buying negatively geared properties

Looking forward to picking your brains on this one Dazz