Long term planning

S

scientist

Hi all

I want to ask for some advice on how to steer myself towards my long term goals.

Basically I'm 26 and married, no kids. Our assets and liabilities currently are (very rough market value estimates):

830k ppor (100k debt - almost paid off!)
650k IP (480k debt)
150k combined super

I'm in a position to buy another resi by converting the super into a SMSF in the near future, which is currently what I'm planning to do.

Our combined income is roughly 250k pa after tax (we run a modest but successful small business)

I guess I'm in a good position but I'm very far from my goals. I want to be able to do the cool things some of you guys are doing - buy up land and build villas / townhouses / flats on them. I think I have the aptitude for it but there's a couple of obstacles that I currently do not see a solution to:

1) our PAYG income is low and we probably cannot borrow any more than we currently have (we write our own payslips, being business owners). If I write bigger payslips for ourselves, we pay more tax and I'm not even sure if it would lead to much more borrowing capacity. Also banks want to see 2 years of tax returns so this makes me even more hesitant to increase our PAYG payslips for 2 years just so we can borrow a bit more.

2) without going into detail, our business is worthless on paper, so it does not give any strength to our borrowing power.

3) in the next 6 months I will have paid off my PPOR - then I don't know where to put money (the 480k debt is tax deductible so it's not the best place to put savings). Also because of points 1 and 2, I don't think I can borrow more money.

So currently, I'm in a situation where I simply have to wait and slowly save up maybe 200k a year for the next x years.

I guess typing this out made me realise I sort of answered my own question - pay myself more PAYG to get more borrowing capacity. The tightarse inside me doesn't want to incur more tax expense. The alternative is to do nothing and continue putting away 200k a year, hoping this recent surge in real estate prices doesn't continue, and a flat market for 5+ years follows, so I can slowly but surely buy another IP ever 2-3 years (with cash and a tiny LVR). But that seems boring and suboptimal.

Wondering if there's something I can do to steer myself towards reaching my goals sooner. I would love some fresh ideas. Thank you!
 
The capacity to save $200k a year is not peanuts. At your age with what you have already achieved super is not great because you might want the flexibility to retire earlier. If after you pay off your PPOR you have an offset for the IP then at least you are getting the equivalent of say 5 per cent before tax which is better than interest on a term deposit.

Where are your excess funds if your PAYG income is low are these being distributed to a company or held in a company structure. If so as these will be taxed at 30c in the dollar you might as well have an income of $80,000 each - from $37,001 to $80,000 the tax rate is 34c in the dollar including Medicare levy as long as you have private health insurance.

Otherwise put the money in low fee Vanguard index funds.
 
Go interest only on your PPOR. Once you have 100k cash in the offset then have an offset linked to your IP and repeat the process.

Preserve your cash for a buffer rather than paying down tax deductable debt with it.

The profits from your business can be used as income as well as the PAYG income.

Talk to an IP savvy accountant and mortgage broker to get some advice on tax and finance structuring.

Self educate yourself on the areas you expressed interest in. Read books on Property Investing and read this forum as much as time allows.


You are in an awesome position and need to make the most of it with some sound and trusted advisors assisting you.
 
Where is the rest of the profit from your company going? You may be able to use this for your borrowing capacity if it is being distributed to you (or your wife) in some form.

For example, I run my own business through a trust structure. My bank takes the average of the past two years distributions from the trust to my wife and I as income for serviceability calculations. They won't count any distribution to other beneficiaries into account however.

Regards,

Jason
 
Id suggest getting some specific advice froma financial planner, an accountant, and a decent broker/banker so that you actually know what resources you currently have.

Without having a good grip on those things, its hopeless tyring to 1/ Set goals, 2/ trying to attain them.

your borrow cap is quite likely much larger than you believe, but borrowing for more Real Estate Assets may not be your only way forward.

ta
rolf
 
Thanks for all the replies, seems like I'll need to distribute more income to our PAYG - at least in order to get more debt.

In terms of where I want to get to (being able to buy big blocks of land and build on it, using construction and land loans of up to 2mil), what sort of networth should I be at before considering this as a viable move? I'm sorry for the vagueness of this question, I know there are many factors involved but I'm more after anecdotal evidence / average networth and also practical considerations (e.g. surely below a certain level of wealth there are obstacles one would encounter when trying to secure finance of this size etc).
 
Last edited:
scientist said:
In terms of where I want to get to (being able to buy big blocks of land and build on it, using construction and land loans of up to 2mil), what sort of networth should I be at before considering this as a viable move?
Click to expand...

and what would that property be on completion ?

ta
rolf
 
Rolf Latham said:
and what would that property be on completion ?

ta
rolf
Click to expand...

townhouses or villas or flats

I guess people who do those things move up to them from first doing GFs and duplexes and PPOR rebuilds right? Again, I'm answering my own question but would like some confirmation and comments.
 
$250k pa income aint low. I have clients earning $50k - a fair few.

Whether you earn it as PAYE or the business earns it may not matter in terms of borrowing capacity depending on a few things.

There are many potential strategies which you may be able to implement, both on the legal side and the tax side but these will depend on your existing structure. I sugget you start thinking about trusts, read up and then go and seek some legal advice, tax advice and loan advice.
 
scientist said:
Hi all

I want to ask for some advice on how to steer myself towards my long term goals.

Basically I'm 26 and married, no kids. Our assets and liabilities currently are (very rough market value estimates):

830k ppor (100k debt - almost paid off!)
650k IP (480k debt)
150k combined super
That's an awesome position at your age, over 1 mil in equity already!!!
We were married at your age with just 70k equity in PPOR.

I'm in a position to buy another resi by converting the super into a SMSF in the near future, which is currently what I'm planning to do.
Might as well put those super funds to work, something we are just starting now too.

Our combined income is roughly 250k pa after tax (we run a modest but successful small business)
Again, absolutely awesome results for your age, 250 net!
Gives you plenty of options for building massive net worth.

I guess I'm in a good position but I'm very far from my goals. I want to be able to do the cool things some of you guys are doing - buy up land and build villas / townhouses / flats on them. I think I have the aptitude for it but there's a couple of obstacles that I currently do not see a solution to:

1) our PAYG income is low and we probably cannot borrow any more than we currently have (we write our own payslips, being business owners). If I write bigger payslips for ourselves, we pay more tax and I'm not even sure if it would lead to much more borrowing capacity. Also banks want to see 2 years of tax returns so this makes me even more hesitant to increase our PAYG payslips for 2 years just so we can borrow a bit more.
Maybe see a good accountant and broker to see how to structure your situation to maximize your borrowing capacity to be able to reach your goals.

2) without going into detail, our business is worthless on paper, so it does not give any strength to our borrowing power.
How is that possible, as long as your "business" is legal.
Surely there must be some value to it, even if you are simply self employed.

3) in the next 6 months I will have paid off my PPOR - then I don't know where to put money (the 480k debt is tax deductible so it's not the best place to put savings). Also because of points 1 and 2, I don't think I can borrow more money.
Are you actually paying off your PPOR and locking the funds away?
Putting the funds in a PPOR offset would be much better so you can access the funds when you need them.
Then when that offset is full, put excess savings in your IP offset.
Its a bit contradictory that you say this is not good as it won't be deductible, but you're not paying yourself a high enough income, which is also affecting your borrowing capacity.

So currently, I'm in a situation where I simply have to wait and slowly save up maybe 200k a year for the next x years.
That would be considered fast savings for most.
Why not increase your business income?
Leveraging your business with the right systems and people in place should be able to multiply your many times over, unless you are already taking 100% of market share of what you do and don't want to expand laterally.

I guess typing this out made me realise I sort of answered my own question - pay myself more PAYG to get more borrowing capacity. The tightarse inside me doesn't want to incur more tax expense. The alternative is to do nothing and continue putting away 200k a year, hoping this recent surge in real estate prices doesn't continue, and a flat market for 5+ years follows, so I can slowly but surely buy another IP ever 2-3 years (with cash and a tiny LVR). But that seems boring and suboptimal.
Yes, pay yourself more, keep developing your biz and increase profits, double than double again over the coming years and income will be much better.

Wondering if there's something I can do to steer myself towards reaching my goals sooner. I would love some fresh ideas. Thank you!
Click to expand...

Please see comments in red above.

You're in a great position already.
You'll be surprised at how far you can go in just the next 5 years if you keep working on your biz and propert ventures.
What worked for us is exactly what you are doing, get into business and use the profits to develop property.
Our latest development of 6 townhouses was paid for by cash flow from our business profits, except for the final 300k because construction finished before we could generate that last little bit of cash.
Developing and holding new properties when on a high income will maximize deductions via depreciation and minimize maintenance, a good combination.
Setting up as your own bank will make you unstoppable if banks won't lend you money.

Keep up the good work and get your structure set up right from the start.
 
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Ace in the Hole said:
Please see comments in red above.

You're in a great position already.
You'll be surprised at how far you can go in just the next 5 years if you keep working on your biz and propert ventures.
What worked for us is exactly what you are doing, get into business and use the profits to develop property.
Our latest development of 6 townhouses was paid for by cash flow from our business profits, except for the final 300k because construction finished before we could generate that last little bit of cash.
Developing and holding new properties when on a high income will maximize deductions via depreciation and minimize maintenance, a good combination.
Setting up as your own bank will make you unstoppable if banks won't lend you money.

Keep up the good work and get your structure set up right from the start.
Click to expand...

Thanks for the detailed comments, much appreciated. Since you're where I want to be at eventually, hope you could give me some insight into the following:

1) Regarding developments, do you need to have heaps of tradie friends / contacts or do you just call up a builder company and pay for a turnkey solution? My worry is - I have no tradie connections at all, and at auctions I attend I notice the duplex sites tend to be bid on by the sort of people that seem to be running a family construction business. I've got none of that, so I do feel like this is out of my comfort zone. On the other hand, if you just pay for a builder company to do everything, would there still be money on the table for you? What about if you intend to sell - after CGT and other transaction costs, am I just earning a management fee, or not even?

2) Is it a good idea to find a partner for my first development project? If so, where would I find someone competent? And why would they want to join with me? If not a good idea, why not?

3) Any books or reading material you recommend that would educate me in this area? Specifically I want to know about the technical details / each step of the process of how to identify feasible land, to the council DA process, to the order of engaging different tradespeople etc.
 
"2) without going into detail, our business is worthless on paper, so it does not give any strength to our borrowing power.
How is that possible, as long as your "business" is legal.
Surely there must be some value to it, even if you are simply self employed."

We ran a business that was 'worthless on paper' for 12 years. Made millions but at the end of the day we lost the 'franchise' (in the broadest possible meaning - it wasn't a franchise in the normal sense). At the end of 12 years we lost the permission to continue running the business and we closed down.

I would think any real franchise owner can loose their business in a very short time without any good will, particularly where they have breached their franchise agreement.

Another area would be those shops that open up in shopping centers and at the end of the lease they simply fold and are never heard of again.

So I would say there are many instances where the business is only as good as the lease or some other external power that override the businesses wishes.

Aside from that we never had any problems getting loans. It did involve directors guarantees but as long as your are confident of your financial position then this shouldn't be an issue.

As already mentioned you need to think about structuring so that you can minimise your tax to pay no more than the company tax rate and then use those funds to invest. This seems to be one of your motivators.

Another reason for structuring your investments is for asset protection. By separating your assets from yourself and your business you will secure those assets even if your business fails or you go bankrupt. But because of the directors guarantees and all monies clause it will not protect you necessarily from the banks.

The other way is as per AITH and go the -ve gearing route and increase your salary and offset it with lots of RE deductions.

Seems you really need to sit down and decide how you want to play the games and then decide what you will do investment wise.

Ideal opportunity would have been to come along to the Chatswood meeting last Wednesday where there could have been plenty of discussion.

Cheers
 
Sit down with someone and work out how much you can borrow and then go from there. Whether you pay yourself $1 or $100k makes no difference as it is the entire business which is looked at.
 
scientist said:
Thanks for the detailed comments, much appreciated. Since you're where I want to be at eventually, hope you could give me some insight into the following:

1) Regarding developments, do you need to have heaps of tradie friends / contacts or do you just call up a builder company and pay for a turnkey solution?
No, I would prefer not to use any tradie friends even if I knew any, which I don't.My worry is - I have no tradie connections at all, and at auctions I attend I notice the duplex sites tend to be bid on by the sort of people that seem to be running a family construction business. I've got none of that, so I do feel like this is out of my comfort zone. On the other hand, if you just pay for a builder company to do everything, would there still be money on the table for you?
You just need to do research, get some experience and shop around for the right services at the right price.What about if you intend to sell - after CGT and other transaction costs, am I just earning a management fee, or not even?
You need to do the figures, look at some past example small developments, there are many to learn from.

2) Is it a good idea to find a partner for my first development project?
No in my opinion, go solo, less complicated, more profit.If so, where would I find someone competent? And why would they want to join with me? If not a good idea, why not?

3) Any books or reading material you recommend that would educate me in this area? Specifically I want to know about the technical details / each step of the process of how to identify feasible land, to the council DA process, to the order of engaging different tradespeople etc.
A lot comes from experience.
To get experience, you have to take action, if you make mistakes learn from them and do it better the next time.
So best to start small and move up gradually.
Click to expand...

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