Moving forward and retirement planning

[FrankGrimes]

Bare with me, this will probably be a long post.

I’ve been reading this forum now for over 3 years, read all the books etc. I’m now happy with my level of knowledge about property investing and investing in general. However, I feel like I’m just buying and investing with no clear goals about what I’m actually trying to achieve, I’ve just been coasting along. This is what I want change starting now.

I’ve now set clear goals about what I want in the future.

- Retire from work at 40 on 80k p/a. I just turned 24, giving me 16 years to achieve this.
- Own my PPOR outright by 40, value approx 750k in today’s dollars. This might sound excessive, but 750k is what you need for the areas I like.

On my calculations I need about $1.75 Million in today’s dollars to achieve these goals. This is based on investing about $1 Million for income (in an asset yielding 8%) and the rest in the PPOR.

Now, my biggest issue and question is actually working out exactly what I need to do in order to achieve this. How many properties do I need to buy? To what value? I just simply don’t know where to start.

My current situation is

IP1 – Value $230k Loan $183k Rent $180 p/w
IP2 – Value $215k Loan $166k Rent $185 p/w
Listed Property Trusts – Value $72k Loan $37k
Personal income – $54k
Net worth – Approx 130k
No bad debt

This is my dilemma. Where to from here? I really need some guidance about how I actually go about planning to reach my final goal.

Look forward to your thoughts.

Luke

 

[Rixter]

Hi Luke,

This is a recent post that describes my investment strategy and how to create a passive income LOE. It may be of interest to you.

The capital growth averaging (CGA) strategy I've chosen utilises a regular purchasing cycle similar to what Dollar Cost Averaging is to the sharemarket. The major underlying principle to its success is it relies on your "time in" the market, NOT "timing" the market, and never never sell. So in other words it does not matter whether you buy at the top of a boom or at the bottom, just so long as you purchase good quality, well located property in high density areas ( metro area capital cities), at or below fair market value, on a regular basis. I've been purchasing IP per year.

I've been purchasing new or near new property over older style property for several reasons, the main ones being (in no particular order) -

1/ To maximise my Non-Cash deductions
2/ To minimise my maintenance & repair costs
3/ More modern & Attractive to tenants - thereby minimising potential
vacancy rates
4/ Ask a higher rent - thereby Maximising yields

Without getting into the "which is better debate, houses or Units??", I preferr to purchase Townhouses & Villas with a 30% or greater land component thereby eliminating multi story units or high rise apartments, for several reasons. The mains ones being (in no particular order) -

1/ lower maintenance & upkeep for the tenant
2/ lower purchase or entry level into a Higher capital growth suburb area
3/ rapidly growing marketplace (starting both now & into the future) wanting these type properties. This is due the largest group of people to ever be born (being the Babyboomers and Empty nesters) starting to come into their retirement years. They will be wanting to downsize for the following main reasons - lifestyle & economic.
4/ greater tax advantages & effectiveness thus maximises cashflow.
5/ able to hold more individual properties spread across your portfolio - thereby minimising area over exposure risks by not holding all your eggs in only a few baskets, so to speak

I look to buy in areas with a historic Cap growth of 7%pa.

Getting back to CGA, as the name suggests it averages out the capital growth achieved on individual properties with your portfolio throughout an entire property cycle, taking into account that property doubles in value every 7 - 10 years. Thats 7%pa compounding.

The easiest way to explain what Im meaning by this is to provide a basic example taking into account that all your portfolio cashflow will be serviced via Rental income, the Tax man, an LOC and/or Cashbond structure.

For ease of calculation lets say we buy a property for $250k, so in 10 years its now worth $500k. Now lets say we do that each year for the next 7-10 years. Now you can quit the rat race.

So in year 11 ( 10 years since your 1st Ip) you have 250K equity in IP1 you can draw out (up to 80%) Tax free to fund your lifestyle or invest with. In year 12 you do exactly the same but instead of drawing it from IP1 you draw it from IP2. In year 13 you do the same to IP3, in year 14 to IP4, etc etc etc. You systmatically go right through your portfolio year by year until you have redrawn from each property up to year 20.

So what do you do after you get year 20 I hear you say ?? hmmm..well thats where it all falls into a deep hole - You have to go get a JOB - nope only joking!

You simply go back to that first IP you purchased as its been 10 years since you drew upon it first time around and its now doubled in value ($1M) yet again - so you complete the entire cycle once again. Infact chances are you never drew each property up 80% lvr max , so not only have you got entire property cycle of growth to spend you still have what you left in it first time round that compounded big time. Now you wealth is compounding faster than you can spend it! What a problem to have.

Say over the next 16 years you have as your timeframe, you amass a Property Portfolio of $3M (quite achievable) appreciating at a conservative growth of 7% , then your nett weath is growing at $210,000 p/a TAX FREE.

Getting back to what I said in my opening paragraph about it does not matter where you buy within a property cycle just so long as you do buy, This is because you will not be wanting to draw upon it until 10 years later after its achieved a complete cycle of growth.

Well thats the Basic Big Picture of CGA. Once its set up its a self perpetuating, TAX FREE cashflow income money machine.

Luke, I hope this has helped you.

 

[The Y-man]

I’ve now set clear goals about what I want in the future.

.....

Look forward to your thoughts.

Luke

Well, believe it or not, now might be the time to shop for a good financial planner to start working strategy. Many look for a FP before thay have any idea of where they want ot get to (it's like trying to choose a mode of transport without knowing the destination).

Find one whose style sits comfortably with you in terms of property etc.

Cheers,

The Y-man

 

[Leandro]

Hey Frank,

I am the same age as you and have just started getting into property (just signed contract on first PPOR) after about two years of reading this forum, property books and investing in managed funds. So i will be watching this thread with interest.

As for Y-man comments, i too have a financial planner, and i believe they can be helpful if they are into the investment arena's that you are pursing (property, LPTs) and more, and they are walking the talk.

Good luck

 

[FrankGrimes]

Sorry all - been busy at work. Appreciate all comments so far, will update on the weekend.

 

[grossreal]

hi FrankGrimes
interesting tread.
what I think you need to do is plan a form of attack and to do that you need to work out what your goal is.
and that goal is very different for all of us my goal is very different to yours.
looking at your goal today I am past that point and your goal will also pass this point once you get there.
your goal will and should always change( or its not a goal )
to achieve anything you need to plan and in that plan you need to be able to achieve your bench mark points, this is done on a 5 year term.
you don't need for me a financial planner you need people around you that understand your goals and are willing to help you to achieve them.
and sorry to any planners but if you do the above you don't need planners, managers or for that matter dare I say guru's.
you need to set acheivable goals and amke sure you meet your goals.
I do and I tell my group when I don't meet my goal in no uncertain manner.
I don't mind winning and I do lose every so often but my goal is on line and I meet my personal goals
to acheive what I want and the peramitters I have set.
you do need to set yourself a goal and get there.
if this goes right or wrong, this goes right or wrong, this gets me to my next step.
be very comfortable in both yourself and what you decide and check that what you are doing is on track with what you want to acheive and then what everyone else acheive is interesting to read but does not affect you that much.
thats my .002 and I am 5 years of acheiving my goal ( and moving current very fast to that point)and I am well past my original reference point.
hope you do well

 

[Glebe]

Luke,

Your $1.8 million goal will be a $2.8 million goal in 16 years time (if CPI is 3%).

$130k for a 24 year old is absolutely awesome. Don't be suprised if you're a millionaire by 32.

I think given your starting point your chances of achieving your goals are very high.

A few questions -

a) would you be mentally relaxed living off your (non-guaranteed) capital gains in retirement, or would you need to be cashflow positive $80k p.a?

b) no shares in your portfolio now.. but never ever??

c) know any rich chicky babes?

 

[FrankGrimes]

your goal will and should always change( or its not a goal )
to achieve anything you need to plan and in that plan you need to be able to achieve your bench mark points, this is done on a 5 year term.

Definitely. I know my goals will change as I get older and my priorities change.

Luke,

Your $1.8 million goal will be a $2.8 million goal in 16 years time (if CPI is 3%).

A few questions -

a) would you be mentally relaxed living off your (non-guaranteed) capital gains in retirement, or would you need to be cashflow positive $80k p.a?

b) no shares in your portfolio now.. but never ever??

c) know any rich chicky babes?

Glebe. Thanks for the kind words!

a) I don't mind. I can see the advantages and disadvantages of both.

b) I did, but chickened out when the market started going sideways and switched to LPT's. Very happy with that choice, as they have returned about 10% in 3 months! And shares.... Well

c) Haha. Might be easier to just find myself a sugar lady?

So 2.8 Million in 16 years, thats going to be challenge. Again, I come back to the issue of how many properties? To what value? I'm trying to work out how. If anyone has a spreadsheet that could assist I would love to see it.

Rixter's strategy sounds very valid and makes alot of sense. However, how do you overcome the serviceability issues to buy every year? I'm already close to my borrowing limit.

 

[Twitch]

Rixter's strategy sounds very valid and makes alot of sense. However, how do you overcome the serviceability issues to buy every year? I'm already close to my borrowing limit.

there's been a few threads on this, it seems the answer is no/low doc loans or cashbonds.

 

[Mr. Fabulous]

Rixter's strategy sounds very valid and makes alot of sense. However, how do you overcome the serviceability issues to buy every year? I'm already close to my borrowing limit.

Talk to a broker, re: income LPT's are a good start, look at ways to increase your employment income, get a second job, look at value adding.

Based on what you've managed to achieve so far, I would be very very surprised if it took you another 16 years to attain your goals. I think 10 years is pretty realistic.

Mark

 

[XBenX]

Luke,

Your $1.8 million goal will be a $2.8 million goal in 16 years time (if CPI is 3%).

Glebe,

A solid point that I always remind myself to include when completing any long term plans.

Thanks for bringing it up.

An example in context.

If Bob retires at age 40 he will have $2m in super when he reaches 60 - that be his conservative estimates will produce $100k in income PA. $100K pa is Bob's goal.

Bob thinks he is fine to retire at 40.

But what is the present value of that money?

It might only be $30K!!! Bob then needs to ask himself whether he would retire on $30K today?

Even though his goal was $100K and he is getting $100K its not the $ goal that is important. It is the purchasing power of those $$$ that are his real goal.

 

[Gregory]

Hi Luke,

So in year 11 ( 10 years since your 1st Ip) you have 250K equity in IP1 you can draw out (up to 80%) Tax free to fund your lifestyle or invest with. In year 12 you do exactly the same but instead of drawing it from IP1 you draw it from IP2. In year 13 you do the same to IP3, in year 14 to IP4, etc etc etc. You systmatically go right through your portfolio year by year until you have redrawn from each property up to year 20.

So what do you do after you get year 20 I hear you say ?? hmmm..well thats where it all falls into a deep hole - You have to go get a JOB - nope only joking!

You simply go back to that first IP ...

Hi Rixter,
Thanks for sharing your strategy, most interesting read. My strategy was to gradually sell up some of my IP's at retirement, reduce the debt and live of the rent of the remaining IP's. Of course with this I'll be slapped with CGT and Income tax on the rent. Coming back to your plan, just wondering if you can ellaborate on :

1. While you will have ample equity at regirement, will you have the DSR (debt service) to draw on this equity? Are there lenders who will lend purely on equity?

2. With your strategy, the debt keeps increasing even at retirement right. What happens to the debt when we pass on ? Wouldn't our kids be left with this huge debt and huge CGT when the estate goes to them ?

cheers
greg

 

[grossreal]

hi Gregory
yes there are lenders that lend on equity alone and the ones I know most do,
they look at what is paying the debt and projected cash flows.
with regards to you passing on
if the structure is a company and trust
it carries on after you are well and truely gone.
and if you separate your lenders you just role over your lenders and they give you better deals as you go and you use split loans to draw out the equity as required.
yes you never pay of the loan and yes you have very high debt levels and again yes its not for everyone and is not recommended to anyone as advice but it is system that for me works.
I use developments to fuel the growth and reduce the cost line from the start.
and use the off sets split loans to fuel the developments.
I only sell down 50% and then relend with a different lender then did the development funding as they lend on current valuation.
the equity draw is not taxed at this stage ( that may change ???) and the kids are part of the structure so they take over as I fly to hell.

with the available split loan cash.
you have a very large available cash tin should you need it.
and if you do double investing that is 1 neg resi and 1 comm posi
and equity lend against the term deposit which is in your split loan
for the deposit for the 30% short fall on the comm ( your lender can do this)

the added comm return negates the neg on the resi.
so in effect they are both neutral.
you cpi or 6% the comm so you have a fixed interest rate with a min 6% increase in rent on the comm.
and then when the fixed term is up
you refinance and the new higher rental plus the cash over the term pays the loan and you start all over again and you have the difference in cash.
example
a 400k comm in sydney started in 2001 at 36k
is currently at 52k and that covers a 7.4% westpac loan to 750k so thats 350k available cash thats 70k per year no tax and the rent is neutral as the rent is covering the loan.
this cash is used to hold the growth units that give added cash flow.
not simple but very effective.
the lenders don't like your debt levels but they do like the equity positions and your coverage.
again not for everyone

 

[Rixter]

Hi Rixter,
Thanks for sharing your strategy, most interesting read. My strategy was to gradually sell up some of my IP's at retirement, reduce the debt and live of the rent of the remaining IP's. Of course with this I'll be slapped with CGT and Income tax on the rent. Coming back to your plan, just wondering if you can ellaborate on :

1. While you will have ample equity at regirement, will you have the DSR (debt service) to draw on this equity? Are there lenders who will lend purely on equity?

2. With your strategy, the debt keeps increasing even at retirement right. What happens to the debt when we pass on ? Wouldn't our kids be left with this huge debt and huge CGT when the estate goes to them ?

cheers
greg

Greg in Relation to question 1 as grossreal has mentioned yes there are straight equity lenders, lo/no docs available as well as all the other ways of increasing income.

If you purchase in own name yes it all goes to who ever you leave it too.....Yes they pay CGT and have a huge debt but they will be more than appreciative of the HUGE portfolio value that will more than offset any debt & CGT payable.. They wont even have to sell the portfolio to pay CGT as they can simply redraw funds to pay it and keep working the LOE strategy to fund themselves also.

Hope this helps.