How to improve my strategy ....

Hi All,

I'm still on L-plate with prop investment and hoping the forum experts who have made it could give me some pointers on how to achieve my goal a bit sooner.

* Goal: would like to have a passive income of $50k a year + own PPOR

* My situation:

I'm in my early 30's, have no PPOR or other non-tax deductable debts.
Salary income: 100k-120k which may drop by 30% within the next 2 years as I plan to switch to another more fulfilling job but will significantly rise again after 2 years.

I currently have:
-$1.7mil portfolio of 5IPs, slightly +ve geared at 90% LVR.
-$430K cash buffer sitting in offset, saving interest on the investment loan giving the portfolio a net cashflow of ~$30k pa after all outgoings (and a bit more after tax deductions.) The remaining loan balance is fixed for 2 years at ~5% interest rate.
-$60K Share portfolio, acquired over 5 years ago.

My strategy is to buy and hold neutrally geared established houses in capital cities. I plan to never sell and eventually live off equity if possible. Any equities I've gained has been pulled out to fund additional IP purchases.

I'm very risk averse. I know it can be a waste saving $430k in offset account as the $ value gets eroded by inflation but at this stage it gives me the comfort of having a bit of positive cash flow and the security of not having to make a forced sale if interest rate spikes beyond 7% in 2 years time. However it's there also because I have not found a more profitable way to use this funds (hence this post.)

I'm planning in a few years time perhaps to purchase a reno for PPOR (nothing fancy, just about $350k in a modest suburb) in Melbourne where I live and add value or to turn it into a cash cow. I cannot do this at the moment due to personal circumstances. However I can save about $50k+ a year.

I would like to reach my goal, without relying on the $430k sitting in the offset account to reduce interest cost. This saving is planned for PPOR in the near future or to fund other investments etc.

My banker says I can continue acquiring more IPs as long as they are neutrally geared and I can fund the deposit. This is not too hard with the current low interest rate however I'm already heavily geared at 90% LVR and looking at the repayment figures I do have a bit of fear creeping up if interest rate rises above 7%.

Happy to hear any suggestions.
 
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So you are geared at 90% on $1.7m - did you pay LMI on the entire loan????

Nothing wrong with the money in the offset account as that saves you interest each year. Is there a reason why you aren't able to purchase the property in Melbourne now using some of those offset moneys and hold it until you are in a position to do so? If you are going to switch to a lower paying job you may not be able to afford the purchase after you switch.
 
Even though your loans are currently at 90% LVR, if you 'theoretically' dumped the cash from the offset accounts into your loans it would reduce your LVR to ~65%, which is a much healthier overall position (but relies on you not touching money in offset).

If you have no intention of ever highly leveredging your position, it may make more sense to avoid LMI by paying larger deposits rather than having so much just sit in an offset account. You obviously have to weigh this decision against the flexibility having money sitting in your offset gives (but you are paying LMI for this flexibility, so its costing you money even if you never use it).

Something to think about going forward is Land Tax, if you continue to invest solely in Victoria (assuming thats where your whole portfolio is currently located).
 
Hi Aaron_C,

I didn't pay LMI on any of my puchases as I work for my lender and 90% LVR without LMI is a staff benefit.

I'm currently renting and sharing as the cash flow works out better. Living in an area where I can't afford to buy, be close to work and save a lot of travelling cost & time. Also, there's not much growth in Melb in the areas I can buy in plus yield is just terrible. I'm planning to wait maybe a couple of years for the Melb market to pick up a bit more. 4 of the IPs I purchased are from interstate and they don't cost anything to hold.

Hi bumpskins, My IPs are spread across different states so at the moment I'm not paying any land tax yet.
 
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You are nearly there.

You have $30k in passive income from the properties and dividends from the shares of about $3,000 pa (guess).

So you only need another $17k pa in income to get to your goal.

to get this you could save up another $340,000 into your offset which could take you about 7 years. Maybe less with rent increases.

Maybe another property sooner would speed things up - if the right property.

Once you reach the goal then what?
 
Hi Terry,

That $30k passive income is purely dependant on my $430k savings parked in offset account and the rest of the loan being fixed at ~5%. However the good time won't last forever, after 2 years interest rate will likely go up and hopefully rent too to iron out the extra interest cost.

Without the offset savings my portfolio is currently just neutrally geared with very little cash income.


You are nearly there.
You have $30k in passive income from the properties and dividends from the shares of about $3,000 pa (guess). yes you are correct :)

So you only need another $17k pa in income to get to your goal. yes :)


to get this you could save up another $340,000 into your offset which could take you about 7 years. Maybe less with rent increases. Is there a way to achieve this faster through investments without relying on savings alone ? I've buffered for rent increases to cover the future interest rate rises after 2 years


Maybe another property sooner would speed things up - if the right property.
yes, I'm hoping to get maybe 1 or 2 more this year, do you think this risky given my high LVR ?

Once you reach the goal then what?
Not sure, maybe quit my job and just live a simple life doing the things I enjoy. :) Realistically, I'll more likely continue working but by choice. Also there is a very long way to go if I want to own PPOR + having a passive 50K income. Is it possible to get there within 5 years ?
 
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Ah, so you want $50k plus a PPOR fully paid off.

Have you ever lived in one of your investment properties? Just thinking for CGT purposes.

Would you ever want to live in one of them?

Probably still possible to generate the income wanted within 5 years, not sure about the PPOR being fully paid off. If you took your cash and paid off a cheap PPOR you would be back down to cashflow neutral and will still need to generate $50k income.
 
Ah, so you want $50k plus a PPOR fully paid off. ideally yes, sorry I should have added this at the beginning, have updated the start post now :)

Have you ever lived in one of your investment properties? Just thinking for CGT purposes. no, all bought purely for investment purpose, still haven't claimed my FHOG, not sure if I'm eligible anymore after having purchased the IPs.

Would you ever want to live in one of them? at this stage no :)

Probably still possible to generate the income wanted within 5 years, not sure about the PPOR being fully paid off. If you took your cash and paid off a cheap PPOR you would be back down to cashflow neutral and will still need to generate $50k income.

yes you are correct. In 2 years time I'm planning to cash buy a cheap PPOR in Melb, do a reno and add value while living in there. I can't do this at the moment due to long working hours in my current job plus no previous reno skills\experience, low return on invested funds\time\effort and lack of time etc...Hence feeling a little stuck, not really sure where to go or what to do except continue saving, buying & holding and hoping the IP values grow :eek:
 
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