Interesting conversation people.
I thought I'd post this small article from Mr. Navra, it's going back a while now and it's THE post that changed my shorter term strategy and geared it towards LOE. All is going just fine thus far and I make sure to keep a more than reasonable safety buffer ie, spend much less than I earn.
Please see below for an excellent lesson on Navra style investment strategy for I learned that taxation costs reduce positive gearing, or selling by around 50%
Question
Originally posted by Tim & A.L.
Interesting question:
How many properties, or more accurately, what level of gross income, do people think that is a to comfortable to high level to retire on?
Now I’m 35 and want to retire in 10 years on approximately my post-tax income
My goal was/is to use buy and hold IP, and in 10 years generate a net 3% profit
thus if I want to retire on $150K Aussie/year I would need to own a whopping $4.5M worth of property . . . unfortunately difficult to execute
Answer by S. 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%)
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.
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 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!)
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%)
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.
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.
Total tax free income: $125,011 (You smiling yet A.L. ??)
However, let us not forget that there is a cost for using the $369,600 at say 6.5% = $23,998 pa
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.
3) What happens if my property grows at less than the 5%: Spend less!
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.
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 . . .
Hope this is of interest,
Regards,
Steve
