Re: A LENGTHY reply
Steve,
Thanks for the information, it is very very interesting, in fact if what you say is realistic and achieveable then I am just a few years away from retirement.
I have a few questions.
>>>>>
Steve,
Thanks for the information, it is very very interesting, in fact if what you say is realistic and achieveable then I am just a few years away from retirement.
I have a few questions.
>>>>>
Steve,Originally posted by Steve Navra
Hi Everyone,
Firstly let us establish the required retirement income:
A.L. would like $150,000 pa in 10 years time and with inflation at say 3% the future dollar amount would need to be: $201,587 pa
I will assume that this is Gross Income, so the net of tax income required will be $105,832 (Reduced by 47.5%)
->>>> OK this is a little less than 2000pw and and own my house in todays dollars but I could live with it! ( Maybe a good bottle of wine or two only on the weekends , and $15 a bottle wine weekdays).
Two points to digest:
Firstly it is twice as difficult if you are trying to create your income out of a taxable income source, example of this is the rental income you might receive from your properties after expenses. (Strangely enough though this is what most of the books teach you to do.) The result of course is the Whopping $4.5M required, which clearly is very difficult.
->>>> Difficult to the point of impossible.
Positive income from an asset source, is unfortunately fully taxed. (Hence the difficulty.)
The second point is that structure can allow your dollar to work multiple times simultaneously.
Example: Assume A.L. has over the next ten years managed to build up a property portfolio of $2,200,000 gross value (Less than half of the whopping 4.5M) with an LVR of 63% (Net equity of $814,000)
->>>> This is very achieveable in my opinion.
This is all that is required to give A.L. his $105,832 pa after tax; suddenly NOT so difficult.
So HOW to achieve this???
Buy a property today for $450,000 (Ah YES 25% above the median of the city say Melburne)
Now we know that Melbourne has averaged in excess of 7% capital growth over the last 10 years, BUT hey these are uncertain times and maybe we are at the top of a cycle etc, etc. I am suggesting that if you apply rental reality, you will NOT overpay for the asset and if you follow the correct criteria you will very likely achieve the 7% irrespective of the current cycle position. HOWEVER, for the cynics out there, I will assume that you refuse to follow my criteria, so let us assume a capital growth pa of 5% (If you get a lesser return than this, you are definitely doing something very wrong!)
->>>> I have very much come to the conclusion that ignoring the rental returns a simply focussing on growth could be dangerous. Investments made on simple hope that prices will keep going up and up independant of the ability to achieve earnings (dividends or rental returns) is doomed to fail. Rental reality (basing the purchase price on the rental returns achievable in the area) is a very nice tool to use to avoid paying too much.
So at 5% pa growth, this Property will be worth $733,000 at the end of 10 years.
Better than this, is the fact that at the end of 3 years the property will be worth $520,000 (Also at 5% pa growth) which means that you have gained $70,000 in equity, which is enough to cover the deposit and costs to buy property number two for $520,000.
It gets even better, because two years later both these properties should be worth $574,000 (still at 5% pa growth) which is an equity gain of $54,000 X 2 = $108,000:
So with a very self satisfied smile go out and buy property number 3 for $574,000.
Note: This occurs at the end of year 5: Now all you have to do is hold the three properties for the next 5 years and if they continue to grow at 5% pa, you are home and dusted.
3 properties each worth $733,000 = $2,199,000
Total DEBT = 90% of each purchase price: $450,000 + $520,000 + $574,000 X 90% = $1,389,600 (LVR of 63%)
->>>> In fact I could get here sooner rather than latter. There are heaps of "Yes, but" issues here such as if property remains flat for the next 5 years (very possible). However I have decided on a plan of "buy -> develop -> generate equity-> hold" that should get around many of these flat market issues ( ouch if market falls, but one step at a time).
SOLUTION: Approach reputable bank and ask for an 80% LOC facility against your total equity: $2,199,000 X 80% = $1,759,200 Less of course the existing debt of $1,389,600 = $369,600.
->>> Dear Westsuck, Please refinace my properties for an 80% LOC, I have a job and enough rental servicablity to meet your requirements. Just did it, should be possible
Buy an income stream (Cashbond) with the $369,600 for three years:
Will provide an income of $123,200 pa (Capital return tax free)
And interest portion of $3,499 pa interest ( which is taxable) X 47.5% = $1,811 after tax.
->>> Dear Westsuck, here is the $370K from my LOC please give me a cashbond paying 123K year.
Never considered it, but I understand the concept.
Total tax free income: $125,011 (You smiling yet A.L. ??)
->>>Nice!
However, let us not forget that there is a cost for using the $369,600 at say 6.5% = $23,998 pa
->>> OK.
So your net of tax living income will be $125,011 - $23,998 = $101,013
Which is equivalent to $212,658 taxable = $158,23 in today’s dollars (3% inflation)
See it is soooooo EASY!
NOTES:
1) You might be asking what happens at the end of the three years, when you have spent the money?? Well $2,200,000 of property growing at 5% pa = $110,000, which is MORE than you are spending each year, so at the end of the three years your properties will have grown by more than you have spent. You can then draw down the equity and buy yourself a further income stream . . . and eventually it goes to your kids.
2) What about serviceability? The cashbond creates serviceability beyond what you will need to continue this process.
->>> Is this really really what happens in real-life? Would a bank really give me more money, based on the fact I have have a cash 3 year cash bond due to fully retired in 3 months and I need the LOC to buy a new cash bond to service the loan over the next 3 years? Mrs AL would worry herself to death (or she would worry me to death)!
3) What happens if my property grows at less than the 5%: Spend less!
->>> 3.5) So what happens if my properties during one 3 year period happend to fall in value or remain flat....? It could well happen coudnt it? During any property cycle negative returns for a period could and do happen. I cannot let my kids scrounge for dropped potato chips and 1/2 eaten burgers in the rubish bins at McDonalds? A purdent course of action is that I need a 5 year buffer? Another thought here is to use a number of smaller cashbonds (some 3 years, some 5 years some 7years) with different delivery periods and start/stop dates...droping income a little but really smoothing out the market ups and downs.
4) What if my properties grow at greater than the 5%: Spend more, or save the extra for a year when it might be lower.
->>> Yes, looking a risks I think a buffer is very reasonable to maintain.
5) If the projected property growth is 7% (Yes you got all the selection criteria correct) your income level will be nearly DOUBLE!!
6) If you ‘Value Add’ with shares for example your income will be nearly TRIPLE!
7) Can you do this?? ONLY if you want to . . .
->>> Well, yes I do, the plan I am executing now, building equity should offer me a the option of using a cash bond structure in the (nearer) future. The basic is building equity on well located properties that provide a decent rental return is the core of your structure, few on this forum could fault this!. From a logical point of view what you say seems very fair and reasonable. For my emotional mind, it is seems "good" to live off rental income, but "un-good" to live off increasing debts levels. However the % of debt will remain consistent and if well managed will move down over time!. So it is more a mind-set than a real problem.
My core questions are
- What happens if price rises dont occur during any cashbond period eg. Melboure was flat for 5 years from 1991!
- Spending money from a cashbond without paying tax seems almost a loophole, am I expose to any risk if the government changed the rules?
- Are there many people living of this struture for 5 or 10 years or more? How many people are living the cashbond life?
Hope this is of interest,
->>> Yes very very much, thanks for spending the time to reply, I will print it out and keep around for regular review. Cashbonds seem a lovely way to access equity tax effectively without selling ( triggering CGT) or using a LOC and spending it directly (triggering taxes, and inability to meet banking serviblity requirements)
Regards,
Steve
DISCLAIMER: THIS IS NOT ADVICE, RATHER IT IS MERELY AN EXAMPLE OF HOW INVESTMENT STRUCTURE CAN WORK.
PLEASE CONSULT A LICENSED PLANNER FOR ADVICE BEFORE CONSIDERING SUCH PLANS
