Our plan - please criticise (constructively!)

Hi guys

I’ve been floating around this forum for the past 3 years or so and hope I’ve learned a bit!

I’ve got a problem that has been doing my head in for a while.

Basically, my main investing goal is to retire when I’m 40. I’m pretty set on this, and it’s a big driver for me.

The problem is, I don’t know if I’ll be able to do it using my current strategy. My spreadsheet tells me I’ll just miss it (by 2 years) even IF the banks keep lending to me and all of my assumptions prove to be right.

As a bit of background, my current situation is this:

1. I’m just about to get married, both me and my girlfriend are 28, and we currently rent.

2. We have three investment properties in the inner suburbs of Melbourne valued at $620K, $520K and $450K.

3. We have a discretionary trust that holds $200K of unencumbered, high dividend yielding shares.

4. We have cash of around $30K.

5. We have total debt of $1,270,000 (all deductible and all secured against IPs).

6. So, our net wealth is around $550K.

7. All of the properties we’ve bought have been very negatively geared (which is largely the reason I haven’t wanted to post on the forum yet…this strategy seems to be a bit frowned upon!!) Anyway, currently, our portfolio (including the shares in the trust) is negatively geared to the tune of about $150/week (after tax).

9. Both my GF and I are on good salaries, but we want my GF to have the freedom to stop work at 31 (which is in 3 years and when we’re hoping to have kids).

Our plan is simply to:

1. Buy a home in 4 years.

2. Every year (or as often as possible), approach the banks, draw as much equity as we possibly can against our three IPs and/or home, and then use those funds to buy high yielding shares in the trust.

Really, I want some reassurance from the forum that this strategy sounds ok, or for someone to tell me that I’m dreaming and need a new strategy!! Also, if anyone has any tips that can speed the process up a bit, that’ll be great.

Happy for my plan to be criticised!! I’d much rather know now if there’s a fatal flaw.
 
I suggest you go to the interviews section of the forum and check Keithj's story.

From memory he did something similar to what you are planning. Bought a base of property, drew down the equity as it grew and invested it into shares.

I'd also suggest that with your current networth and age that you will have lots of options which I'll let some more experienced forumites explore.
 
Basically, my main investing goal is to retire when I’m 40. I’m pretty set on this, and it’s a big driver for me.
This is good you have a goal, so you're already in front of 80-90% of the people on the planet :)

The problem is, I don’t know if I’ll be able to do it using my current strategy. My spreadsheet tells me I’ll just miss it (by 2 years) even IF the banks keep lending to me and all of my assumptions prove to be right.
Awwwhhh and you'll only retire at 42 - what a failure! :rolleyes:

1. I’m just about to get married,
Good thing on a personal level :) congrats!

both me and my girlfriend .... currently rent.
Good for investing. Not so good (always) for family stability.

All of the properties we’ve bought have been very negatively geared (which is largely the reason I haven’t wanted to post on the forum yet…this strategy seems to be a bit frowned upon!!) Anyway, currently, our portfolio (including the shares in the trust) is negatively geared to the tune of about $150/week (after tax).
Nothing wrong with that at all in my opinion especially if you are getting good CG.

....but we want my GF to have the freedom to stop work at 31 (which is in 3 years and when we’re hoping to have kids).
Good thing on a personal level - not so good for investing. But life is more than just investments as you know.

Our plan is simply to:

1. Buy a home in 4 years.
Good

2. Every year (or as often as possible), approach the banks, draw as much equity as we possibly can against our three IPs and/or home, and then use those funds to buy high yielding shares in the trust.
Fine. Maybe write some covered calls against these shares too - for extra income?

Look many things may happen to you on the road to your goal. Retire at 40 is a good goal but reality may step in and change your plans. You might have any number of things happen - kids, twins when you planned for 1, periods of unemployment, etc etc. Keep striving for your goal though and enjoy life on the way. What does it matter if you fail and only retire at 45? ;)
 
Little Cove,

It sounds like a nightmare to manage. How do you track income vs expenses for each refinance, given that the interest on the additional equity you are drawing from your IPs is used to buy shares, therefore is still deductible, but it needs to be assessed against the income from the shares?

Do you create seperate loans each time you refinance? Or do you just leave it up to your accountant?

Cheers,
Gooram
 
Appreciate the feedback.

J_P - thanks for that - it was actually KeithJ's story that changed our plan in the first place - I originally just wanted to buy and hold IPs and wait for +ve cashflow to provide enough income to retire. KeithJ's story changed the plan!

Gooram - every loan we take is a separate loan - so, while we've still got to keep on top of it, it's not too difficult to track. The paperwork is a nightmare though. I've been meaning to see a mortgage broker for a fair while now, but haven't yet got around to it. I'm particularly concerned about whether the banks will keep lending - particularly when the GF stops working - and hope a MB can help with this.
 
Well done Little Cove for having a plan with your GF & working towards your future. To be in your situation at your age is fantastic so you should be proud of yourself. Once the kids arrive, they'll just fit into the plan....until they start to talk and cost money.

I'd be sticking to more property instead of increasing the shares. Property for growth, shares for income (and future growth of course). As Propertunity suggests, write some Calls against your portfolio if you can. Do you trade privately or through a broker? If you had $200K worth of say BHP stock, you could be making yourself a few thousand a month on those as income. $150 is nothing in the big scheme of things, especially if the shares could cover it.

How are you structured within your trust? Are you a company? Do you pay the rent privately or through your company? Does the trust pay for it? I'd be talking to your accountant. He might be able to filter a few things so everything covers itself.

You've got a bit of equity to go out & buy a couple more houses at the moment by the looks of it. Why stop now? Might be able to retire before 40 yet!

Well done. Thanks for sharing. And thanks for doing like my Dad told me to do....if only I'd listened then instead of later. Still, we're on our way. See you there!
 
Hi Kath

The rent we pay is paid by us personally - not by the trust.

In terms of how things are structured - all IPs are held by either my GF or me personally, and all shares are held by the d/t. To get cash into the trust, either me or the GF borrow (in our personal names) against the IPs and then lend to the trust. We charge interest to the trust for all borrowings.

In terms of covered calls - this is exactly the type of suggestion I was hoping for. There's a thread on this on the forum, which I've been reading with interest. I still don't quite have my head around how covered calls work and will benefit me, but I'm literally looking into it now!
 
The problem is, I don’t know if I’ll be able to do it using my current strategy. My spreadsheet tells me I’ll just miss it (by 2 years) even IF the banks keep lending to me and all of my assumptions prove to be right.

...

Happy for my plan to be criticised!! I’d much rather know now if there’s a fatal flaw.

Can't really comment - what's your living costs? Otherwise can't figure out how much you need to retire....

Also, what's your combined income? Need ti to figure out if current plan nutty or not... :)

Cheers,

The Y-man
 
Hi Y-Man - we'll need a fair bit to retire (because we want about 3 kids, who we want to send to private schools, and we want to live in a nice suburb in Melbourne in a PPOR that we wouldn't yet have paid off at 40). My estimate is we'll need income of about $200K (before tax) to live the way we want to.

My GF and I are currently on around $190K together. As I said though, she'll stop working soon, but my salary should continue to increase each year.
 
My GF and I are currently on around $190K together.

Neither of you work in media then...

salary should continue to increase each year.

...yup, definitely not in media. :D


You're ambitious, but I'd be surprised if you don't hit your target as you seem to be making the right moves now.

j_p thanks for the link to Keith's story. Think you just provided me with what I want my strategy to be - already pre-written. Fantastic read.

Cheers
Greg
 
YOUR DREAMING! and thats the great thing about all of this, have a dream , and calculate the plan, if you miss the moon you might be lucky enough to land on a star!

You seem to be switched on enough and as time goes forth, your plans will change, you will find different methods as you continue to read books and articles , some better than what your doing, and some might cost you, but thats life , keep doing what you doing , and be sure the other half os totally on track with the plan , as it seems to me that most pertners, are not as infuised in the wealth stuff as the other.
 
I'd be inclined to pay down debt.
  1. With rising rates, you could be paying out $100K (or more) per year in interest payments. That's an ongoing cost, and it's going to eat into profits elsewhere.
  2. Without debt, and assuming a typical 5% return, your IPs could generate an index linked (to wages) income of around $80K.
My opinion is that increasing debt to purchase into a volatile (and risky) asset class isn't a clever strategy.

Re: KeithJ's strategy, he benefited from a combination of a long economic boom, and corresponding growth in house prices. My suspicion is that the next few years are going to be far less investor friendly...

That said, it should present some fantastic buying opportunities. :D
 
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