I would like some advice....

I would appreciate some advice from investors. I have 7 IP's valued at
$3.1M with debt of $2.1M. I am renting here in Sydney and would eventually like to shift into one of the properties. Due to health issues I have been made redundant and receive a redundancy pension of $6K (net) per month. The rental income from the IP's is approximately $8 per month (also net) giving me a total income of $14K per month. However, the mortgages are collectively $10K per month.
I have $1M in super which I can draw down on as an allocated pension. I also have $200K in cash savings.

I have been toying with the idea of structuring my cashflow as follows:

Monthly income

$6K pension
$8K rental income
$6K allocated pension from super fund

Monthly Liabilities

$10K IP Mortgages

This will give me $10K per month to live off and $200K as a cash buffer. My question is if I wish to shift into one of the IP's would I be better off drawing down $600K from the super fund (tax free in 18 months when aged 60) and paying off the house or keep drawing down an allocated pension. Due to assets and income I won't receive the old aged pension, so this is it.
My own personal views are that if I keep drawing down an allocated pension when I shift into the IP then I can adjust the drawdown amount up to 10percent. If the average balanced sharemarket return has been 7 percent then I would only eat into the $1M capital at 3 percent per year. In 20 or so years when the $1M runs out I can then draw down against one of the other IPs and pay off my then PPOR (if the bank lends it).

Thanks
 
cannot give you financial advice, liverpool st, but in other regards, there are of course other issues.

will your health status become a factor? quality of life issues too. are you comfortable to have the 6-7 investment properties or will it be onerous?

good luck with the future and enjoy your life. experts will be able to guide you re your financial structuring.

our health is so important. we recently went to a memorial service for a relative who was fit, happy and very active but unfortunately discovered her backache was something more. she went from diagnosis to death in 10 weeks.

good luck with everything.
regards.
 
Thanks Pully,

I wasn't really after financial advice, just people's thoughts. I have looked at the living on equity posts and just thought the structure I proposed might work.

Thanks again
 
In 20 or so years when the $1M runs out I can then draw down against one of the other IPs and pay off my then PPOR (if the bank lends it).

Hi there Liverpool,

To be honest with you...it's getting late and I am a little tired for numbers. I know...little help to you, sorry about that.:eek:

This part stood out for me...I would hate to be 80 and relying on a bank to increase my loan.

Have you considered an alternative of actually selling an IP or two in ten years..then 20 years...... ?

1. You will have accumulated alot more growth. Your Portfolio should be worth twice as much in 10 years, let alone 20.:):)
2. You will not need to worry about banks and their lending criteria.
3. Less paperwork/management.
4. In consideration that rents will rise, you may be able to pay out your PPOR and say 5 IP's and live comfortably on the rental income. This is actually part of my plan.

Merely my suggestions.

Regards JO
 
The future

Thanks Josko,



I might go along the line of selling one or two in 10 years or when they double. I will have to look at the CGT at that time. I just thought it is just as easy to borrow against them - no real estate fees, hassle etc. and I can leave what is left for my daughters, albeit with a 80percent LVR - better than nothing


Thanks
 
Man.. Heres a tip for you. Good investors don't use their own money to fund property! Its better to find out sooner rather than later I guess ;)

Capitalise interest. Your profit will grow faster than your equity charge.

Eg
3.1 Mil portfolio.

plus 7% is $3,317,000

How much will it cost to hold after rents are deducted? that depends on your interest rates.

Lets say.. 7% on 2.1 mil, $150,000
Lets say you receive $100,000 in rents.

So youve spent $50,000 of your equity, but you made $217,000. - $50,000 = $167,000.

Keep doing the numbers year on year and be amazed at what happens.

Some food for thought.
 
Capitalising interest

Thanks Investor2009,

Yeah I know what you mean. I read the Ed Chan book on Wealth for life. It scared me a bit with the capital on the loans rising exponentially due to the drawdown to service the loans. Even if there is no capital growth in the next few years I suppose I could do it until the rents catch up to service the mortgages. Good tip, thanks for your help
 
Man.. Heres a tip for you. Good investors don't use their own money to fund property! Its better to find out sooner rather than later I guess ;)

Capitalise interest. Your profit will grow faster than your equity charge.

Eg
3.1 Mil portfolio.

plus 7% is $3,317,000

How much will it cost to hold after rents are deducted? that depends on your interest rates.

Lets say.. 7% on 2.1 mil, $150,000
Lets say you receive $100,000 in rents.

So youve spent $50,000 of your equity, but you made $217,000. - $50,000 = $167,000.

Keep doing the numbers year on year and be amazed at what happens.

Some food for thought.

Hm-m-m. That sort of advice can be dangerous.

You have not allowed for Compound Interest.

You have not allowed for a credit crisis.

You have not allowed for DECLINING property prices.

An experienced "good" investor would know that there can be extremely long periods, years even, where rents don't rise.

Liverpool, I would only choose this option on very Low LVR's and with Capital Growth Properties. Looking at your no's a little closer (amazing what a good nights sleep can do:)) I would say your LVR's could be high at this stage, yet you seem to have sufficient income. It looks as if you are in a fantastic position financially and should have no need to Capitalise Interest.

I like this option :
would I be better off drawing down $600K from the super fund (tax free in 18 months when aged 60) and paying off the house or keep drawing down an allocated pension. Due to assets and income I won't receive the old aged pension, so this is it.

If your PPOR is paid out you are not paying unclaimable interest and your main asset is unencumbered.

What pully mentions accounts for alot.

My aim would be to start trying to reduce the debt.........not add to it. I would start a plan in motion to have x,y,and z paid off in ten years. Choose your best performers in 10-15 years and use the worst performers to pay them out.

You have no NG to claim deductions. You should speak to a property accountant about the implications of CGT at retirement etc.


I really stress: Speak to a good accountant.


Regards JO
 
I've always thought "Living off Equity" as discussed here is a crock.

Your pension is quite livable so I, personally, would go for safety and reduce my LVRs by selling a property on a regular basis to spread tax. You DO get a modest dividend return on shares and it is much easier to cash-out cap gains, you just sell some shares. Use the time to "dollar cost average" into shares. Again I'm not real keen on it personally as I am more a "gunslinger" in the market but I would never advise that path to anyone. :D

I haven't read Josko's replies in detail but they look sound to me, but Jo is very sane in her(?) thinking. One of the better posters IMHO.
 
In 20 or so years when the $1M runs out I can then draw down against one of the other IPs and pay off my then PPOR (if the bank lends it).

Hi Liverpool St

A very basic rule of thumb is that property values double every ten years.

Historically, this varies between areas, with some localities taking twenty years and some as little as five years.

If you are looking at 20 years or so before your other funding is depleted, why would you think that you would be 'drawing down' ie borrowing, against one of the investment properties to pay out the balance of the property you may then occupy?

Culling the herd is one of the long term tactics of the property investor.

You have 7 properties with a current street value of $3,100,000, and a principal debt of $2,100,000.

If the debt does not increase, but the value of the properties does, then in due course the properties will be worth eg $6,000,000 with a debt of $2,100,000.

If you sell one of the properties to wholly own the owner occupied property, in '20 years or so' then let us assume that you would have 5 income producing properties remaining at a pro rata valuation of not less than $4,300,000

Even if these properties produce 5% gross income, that's $215,000 per annum, and even if you still have $2,100,000 debt to service, let us say at a whopping 10% interest per annum, that's $210,000 per annum, so OK $5,000 is for your Christmas Dinner BUT if the properties have doubled twice in the 20 years you would have a rental income of $430,000 - $210,000 = $220,000 income per annum.

Many things can happen in 20 years. You seem to be well set up financially and the money is there for your benefit. One of the benefits of property is that over a reasonable period of time we can generally see growth in the capital value. One of the disadvantages of property is that we cannot just sell the bathroom if we want some extra cash, and of course, property requires management, repairs and maintenance and these expenses tend to be periodic over time.

Your scenario indicates a $10,000 per month living allowance after investment expenses are met. This is a lot of money. Obviously, if you do not need the whole $6,000 per month allocated pension from superannuation the fund will last a lot longer if you are drawing less, particularly in the early years of taking the benefit.

All in all, you have a nice problem to deal with.

However, in order to make the most appropriate decision regarding structuring you will need to seek professional advice. Perhaps your superannuation fund has financial adviser available to assist when people are in the transition from work to retirement.

Good luck in your retirement and I hope you enjoy every minute of it!

Cheers
Kristine
 
I would appreciate some advice from investors. I have 7 IP's valued at
$3.1M with debt of $2.1M. I am renting here in Sydney and would eventually like to shift into one of the properties. Due to health issues I have been made redundant and receive a redundancy pension of $6K (net) per month. The rental income from the IP's is approximately $8 per month (also net) giving me a total income of $14K per month. However, the mortgages are collectively $10K per month.
I have $1M in super which I can draw down on as an allocated pension. I also have $200K in cash savings.

I have been toying with the idea of structuring my cashflow as follows:

Monthly income

$6K pension
$8K rental income
$6K allocated pension from super fund

Monthly Liabilities

$10K IP Mortgages

This will give me $10K per month to live off and $200K as a cash buffer. My question is if I wish to shift into one of the IP's would I be better off drawing down $600K from the super fund (tax free in 18 months when aged 60) and paying off the house or keep drawing down an allocated pension. Due to assets and income I won't receive the old aged pension, so this is it.
My own personal views are that if I keep drawing down an allocated pension when I shift into the IP then I can adjust the drawdown amount up to 10percent. If the average balanced sharemarket return has been 7 percent then I would only eat into the $1M capital at 3 percent per year. In 20 or so years when the $1M runs out I can then draw down against one of the other IPs and pay off my then PPOR (if the bank lends it).

Thanks

Not receiving the pension is actually good. Why would you want it?

In simplistic terms, you could wait until 60, draw down the super, sell a few IP's and use the funds from al that to pay off all the debt.

There should still be more than enough income from the remaining IP's to fund you forever.

And, the remaining IP's are still going up in value, so if you get caught a bit short (seriously doubt it), you can sell another one to free up some cash.

There will be tax issues probably, so the accountant needs to be consulted to work out how to minimise it legally.
 
My Plan

This is a great forum and I would like to thank everyone who has given advice. People on here are more than generous with their views.

I am leaning towards:

Of the $1M I have in super I will convert $400K into an accumulated pension at 10percent per annum. This will give me $3333 per month. Since March the sharemarket has jumped 44% in six months from its lows and it has another 2,200 points to go to get back to its highs of 2007, which is a rise of 48% from its current value. Hopefully I might catch some of that gain in the next few years.

The other $600K I will leave in the super fund which will be a buffer. Hopefully (I keep saying this) if the sharemarket jumps another 50 or so percent it will be $900K in a few years.


So, I will now have monthly income of

$6K in company pension per month (indexed to CPI)
$8K in rental income (with rents to rise)
$3333 in accumulated pension

This totals approx. $17,333. However, I have IP Mortgages of $10K per month. I can live reasonably well (extremely well) on $7333 per month in Chiang Mai (Thailand) or Penang on that. I will come back in a few years when (or if) real estate prices take off and sell enough to pay off the IP I would like to live in. It is pretty drastic but now is the time for living, when I get back rents/pensions should have risen...I will then live off the $600K (maybe $900K by then) super money and what's left. It's a plan anyway:cool:......

It is just that CGT but I will worry about that when it happens:confused::confused:.

Thanks for your support:)
 
Hey no worries! I'm glad you have come to a resolution.

Don't disppear from SS. They have internet in Penang....I hope.:D

Regards JO
 
Top