Please kick my tyres.....

Hi everyone,

I joined this forum a few weeks ago and have been very impressed with the quality of advice and willingness to help shown by many posters. Please let me know if my post needs restructuring or answers lie elsewhere. I know it's a bit long but I felt the background necessary.

Current situation:
Age 45, wife 41, two boys aged 7 and 5 both in school.
We both owned PPOR in London before we met and kept those when we bought a joint PPOR. We reno'd all 3 properties and made substantial gains as we rode the market.
Moved to Sydney 3 years ago when my wife lost her parents suddenly, loved it so much we sold up in London and, just as prices were pretty low here in 2013, bought a PPOR on LNS.

PPOR: $2.4m (2013), $2.8m (2015). $1.4m mortgage with NAB after remortgaging 3 months ago to free equity for IPs.
Now have $600k ready to go in an offset account.

My wife is a GP earning $140k, I part-own a small IT company and pulled $100k last year inc super. Have moved my UK super over here into an SMSF, but that money needs to sit for 5 years before it can be put into resi property.

I understand that we are in a very fortunate position, but we have got there through our own hard work in day jobs - and being wiling to risk purchasing and holding when others (in property!) were advising us we were paying too much etc etc. My wife is a fantastic wife and mother, but is now fed up of looking at people's privates every morning after 20 years. Losing both her parents at the same time as starting her own family has been very hard on her and it's time I did my bit and used our capital to good effect. We are both great savers and have not been on an overseas holiday for 3 years, spending only on the mortgage and few luxuries. Most of our clothes are 10 years old at least!

Goals
To replace income from salaries and pay off the PPOR mortgage within 14 years, so that when the boys go to university we can retire comfortably aged 58 and 55, rent the PPOR out for at least a year and travel the world.

But...we would love to smash that so that the wife at least could give up work sooner rather than later. She has great taste/insight into property in general, renos and decoration and doesn't take any ***** from tradies. She would love to be running our IPs full time ASAP.

I guess we would fall into the passive investors category for now, in that we would like to never sell the IPs (to avoid CG tax) and see it as a 14 year play to acquire as much as we can.

Plan
This is where it starts to unravel.
I've read the books by Michael Yardney and Steve McKnight, kindly loaned to me by a friend who loves his property. They resonated very strongly given our past capital gains in inner London suburbs. We know we need to get moving and do *something*. Don't really feel we need to pay $2k to a financial planner to hypothesise buying properties in yr1, yr5 all dependent on guessed growth. We know we need to get at least $3m IP portfolio in the next 3 to 5 years, if we can get more all the better.

Went to see Mr Yardney's company Metropole, and listened to similar advice from another friend who recently went to see a similar company. They are all saying buy 1-2 bedders Coogee to Bondi or Neutral Bay to Manly ($750 to $800k) - which again resonates with our experience in inner suburbs, and gut feel that in the long run capital gains there will be highest as Sydney population grows and the wealthiest want to live near the beaches as well as the city.
But then I googled the companies and came across very mixed reviews both on this site (which is how i discovered this site!) and elsewhere. Also the 2% (16k on an 800k unit) seems pretty hard to swallow, and we've stalled on that approach a bit, despite it's immediate appeal.

So we're now thinking of buying on our own in Neutral Bay or around, or looking at another buyers agent. For now we feel perhaps we should be spending time with the boys at weekends rather than being at 10 opens, but equally we could do some to get us going.

Very concerned though by CharlieandKath's thread about Sydney silliness:http://somersoft.com/forums/showthread.php?t=106468&page=5

"From Early on in this thread not many warnings so I got the feeling that there was a fair wave to ride yet.
2nd half of the thread we have sash, see change and skater warning of caution ahead and the worm will turn soon but of course no one knows. Fair bit of experience in those three posters alone.
I'm beginning to take note."

But equally we are used to investing close to home, Sydney seems to have the best long term prospects - and with a young family we need to make things simple - so Sydney seems like the best choice.

Are we mad to carry on regardless of the warnings?

Would it make more sense to buy through a trust so that affordability (already stretched by the $1.4m mortgage on the PPOR) is less of an issue and more reliant on the IP income. Mr Yardney seems to indicate that is the way to go, but I struggle to see how it would work with negatively geared IPs, and we wouldn't get the tax benefits...). But equally if we do in my wife's name or our own names I can see affordability stalling us at 1 or 2 properties anyway.

Are our goals within reach, or do we have to be more active investors?
Would it make sense to start with a Neutral Bay unit, then look for something perhaps a bit riskier?
Or should I be getting on a plane to Brisbane tomorrow?

I'm sorry for the unstructured nature of this post - but I just wanted to make a start and have procrastinated about posting this for too long anyway. I'm just paralysed by the fear of being stuck in a couple of negatively geared properties that don't move for 5 years, or worse - and hoping that a few words of wisdom or encouragement might tip the scales and spur me to do something. I guess our previous IPs fell into our lap by the nature of being PPORs before IPs, and we chose well - it feels a lot more intimidating starting from scratch like this as the stakes are high and we don't know the market here at all.

To round off I will definitely make the next Sydney meetup, but any advice or pointers in the meantime would be very gratefully received. Michael_X's thread really inspired me today, and I've learned a lot already from these forums (including why to avoid x-coll), but the journey is only just starting and with the market peaking it feels like a bad departure time!

Thanks for listening if you made it all the way through my thread!
TheSilverBear
 
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Welcome to the forum!

I'm on my phone so can't post in complete detail but here are some initial thoughts.

- do you know how much passive income you're trying to make in order for your wife to give up her job? I think you should always start with the end in mind

- if my maths is right you have $2m in equity in your place Along with strong income levels. How stable is your business income? I assume your wife's wage is fairly constant.

- with the above in mind I'd suggest maybe thinking bigger. you're trying to create passive income, I don't think low yielding premium sydney property is the way to do it. Have you considered other options like commercial property or maybe even investing in businesses? Obviously it isn't suited to everyone so you need to work out if you're up for it but yields of 20-40% are not rare in small business investments. Risk is naturally higher.

Similarly, a commercial property might on the face of it be higher risk but you may be able to get double the yield and, in theory, retire earlier.

I just think basic buy and holds are a wasted opportunity for you, most people do them because they have no choice and have to stay from somewhere, often with average incomes and minimal capital.

You've got high income and lots of capital do you don't have to play by the same rules as everyone.

I'd suggest spending the time to educate yourself because it's often a case of you don't know what you don't know. Don't rush into anything in the meantime.

With regards to trusts and structures, Terry is a guru, go see him with your wife, pay for some specific advice and ask any question you can think of. The knowledge you gain will be well worth the price of admission.

just my opinion of course, hope it helped somewhat!
 
Thought about selling and moving while the kids are still young?

Spanner in the works, but the $1.4m you stand to make tax free would purchase a nice house outright, with plenty left over to finance 2 or 3investment properties with low LVR/+ve cashflow in most other states...
 
Hi there,
Interesting reading and well done.
There are 2 camps for property. Some people have a mix of both.
Negative gearing
Positive gearing

Negative gearing = great cap growth if chosen well though you are paying for tenants to live in your IP. This strategy used for gaining equity. Keep pulling money out for the next purchase

Positive gearing = No money out of your pocket. Harder to find in central cities and usually a reno helps increase equity so you can pull out for the next property

There are a couple of camps for which entity holds the property,
Your personal name - great for negative gearing...no asset protection if you get sued...possibly more finance options...not able to pass onto your kids on your death
Company atf trust - assett protection from getting sued (they usually can't get to a correctly set up trust...no neg gearing...east to pass onto your kids

I wouldn't buy property in a company only - no asset protection cause the company can get sued
I wouldn't buy in trust only - no asset protection cause you personally can get sued

A good plan is work out
1. how much income you need x2
2. how many properties you need
3. how much profit you need to make

If you avoid mortgage insurance, then you need loans of 80% or less.
You could by $2m of property with 80% loans.
Thats 5 properties at $400,000.
Rent return of $430 per week means you are around neutral geared.
If no loans on the property, thats $15000 interest not being paid x 5 properties = $75,000 income

If that would satisfy your income, then you don't need neg geared properties - head towards the positive ones.
If you want more cash - make it a mix so you can pull out equity and keep growing and keep more rent coming in to cover the neg properties.

So many options to take with property. It depends how much you want to be involved in.


Good luck
 
Thought about selling and moving while the kids are still young?
Spanner in the works, but the $1.4m you stand to make tax free would purchase a nice house outright, with plenty left over to finance 2 or 3investment properties with low LVR/+ve cashflow in most other states...
Thanks for the response Boeman and nice idea, but living in a house on the north shore is one of the wife's requirements ;), and I must admit I agree with her it's a beautiful place to live.

I would have loved to find somewhere $400k cheaper but in the end we found a house that will be a wonderful home for the four of us while the boys are at school and that, my friend, is priceless (well not really but you get my drift!).

Plus we've always gone for the biggest PPOR we can afford as it's CG-free gains, and LNS strikes us as as good an investment area as anywhere else. As people become wealthier and wealthier the better areas and better houses grow as fast or faster than most other areas (c.f. London).
 
Thanks for the response Boeman and nice idea, but living in a house on the north shore is one of the wife's requirements ;), and I must admit I agree with her it's a beautiful place to live.

I would have loved to find somewhere $400k cheaper but in the end we found a house that will be a wonderful home for the four of us while the boys are at school and that, my friend, is priceless (well not really but you get my drift!).

Plus we've always gone for the biggest PPOR we can afford as it's CG-free gains, and LNS strikes us as as good an investment area as anywhere else. As people become wealthier and wealthier the better areas and better houses grow as fast or faster than most other areas (c.f. London).

Those are all fair points but boeman has brought up something pretty relevant. If you did move to a cheaper house and freed up, for example $1m that you got 7% returns on, you would immediately replace half your wife's income.

So I guess you have to ask yourself if the awesome house is more important or the early retirement. That's a question only the 2 of you can answer.
 
just my opinion of course, hope it helped somewhat!
Thanks very much Sanj, every opinion helps and you throw out some interesting ideas. I myself love playing devil's advocate and appreciate your response, it is exactly the sort of reply I was hoping for.

- do you know how much passive income you're trying to make in order for your wife to give up her job? I think you should always start with the end in mind
We couldn't make it work on any less than we make now. Even on $240k between us we're only left with about $12k/month after tax. $4k on the mortgage, $4k on the credit card on a cheap month for groceries, kids things, a few outings etc, and the rest goes on childcare bills and other stuff pretty fast. We're far from extravagant (except in terms of the PPOR), hardly go out, certainly don't try and keep up with the Jones's - we need to go up not down and I reckon Mrs SilverBear deserves it!

- if my maths is right you have $2m in equity in your place Along with strong income levels. How stable is your business income? I assume your wife's wage is fairly constant.
Your maths is right - $1.4m in PPOR and $600k in the offset as seed capital to get us going in property.
Both incomes are stable.

- with the above in mind I'd suggest maybe thinking bigger. you're trying to create passive income, I don't think low yielding premium sydney property is the way to do it. Have you considered other options like commercial property...
Similarly, a commercial property might on the face of it be higher risk but you may be able to get double the yield and, in theory, retire earlier.
I like your way of thinking when you say thinking bigger, but...
Surely the yield is less of an issue than the capital growth? We've got a buffer and my experience and reading of the books mentioned plus this forum lead me to believe that capital growth is the driver of wealth, more so than the yield.
I've had one friend in investment take me through some projects I could invest in, but generally the advice has been to steer clear as it's easy to make a mistake (e.g. large companies selling their offices with themselves as tenant, then moving out 3 or 5 years later leaving the new owner with a lemon). I'm wary as I know little about it and don't want to risk my family's life savings on something I'm so unfamiliar with.

or maybe even investing in businesses? Obviously it isn't suited to everyone so you need to work out if you're up for it but yields of 20-40% are not rare in small business investments. Risk is naturally higher.
Already own a % of my current small business, and the larger parent company in the UK - and am loathe to take many more risks in this area. They just seem a punt. I get emails from business brokers daily and am considering buying another small IT business to add to the existing one, but equally I see greater potential in leveraged resi property.

I just think basic buy and holds are a wasted opportunity for you, most people do them because they have no choice and have to stay from somewhere, often with average incomes and minimal capital.
I would argue with this point, despite the fact it appeals AND I know there is some truth in what you say. Many posters on here, and many people I know who are in a better financial position build large portfolios following just that strategy. But I do hear what you are saying....but would like to clarify and hear other points of view.
Do you mean do a development project? I feel that might be a step too far given our knowledge, but equally a big reno might be doable.

You've got high income and lots of capital do you don't have to play by the same rules as everyone.
I'd suggest spending the time to educate yourself because it's often a case of you don't know what you don't know. Don't rush into anything in the meantime.
Educate myself in what field exactly? There's so much to learn! Areas/Prices? Becoming a developer? The finance side? All of it?!? I'm quite uncomfortable taking a plunge and it would take years to gain enough knowledge to avoid risky failures in say property development, surely?
A builder friend of mine offered me in on a development project he's investing in - but equally you can't really leverage that stuff so the returns suffer and there are risks.

With regards to trusts and structures, Terry is a guru, go see him with your wife, pay for some specific advice and ask any question you can think of. The knowledge you gain will be well worth the price of admission.
Terry who? Not a name that rings a bell from my reading on here.

Anyway, thanks again for your time Sanj
 
Those are all fair points but boeman has brought up something pretty relevant. If you did move to a cheaper house and freed up, for example $1m that you got 7% returns on, you would immediately replace half your wife's income.

So I guess you have to ask yourself if the awesome house is more important or the early retirement. That's a question only the 2 of you can answer.

I forgot to say that the wife is 1/2 German, it's not an argument I could ever win :p
It's a bit of a live now or live later question, and we want to enjoy life now while the family is young and before they become teenagers who ignore us then leave.

Plus I get my own basement mancave and love the house more than I have ever loved any house.

I completely understand your point, but the $600k seed capital is what we have to start with now. I could release another $200k if i sold a shareholding in the UK, but would like to prove the concept first.
 
Hi TSB

Welcome to the forum!

It's a bit of a live now or live later question, and we want to enjoy life now while the family is young and before they become teenagers who ignore us then leave.

Just to challenge this, with your net worth you would be able to sell your PPOR, invest the vast majority of the proceeds in whatever investment you wish and buy an average PPOR (or canal front or whatever floats your boat, so to speak!) pretty much anywhere else you like in Australia. The income from this strategy would see you both spending your time with your kids while they still want to spend time with you.

Of course, I can't convince my wife to go for that idea either but it does frustrate me - the ever improving PPOR roundabout only puts the carrot of mastering their own time further away from people who are immensely wealthy already. It's not a roundabout I enjoy.

As for buy and hold investments, I have NFI. In this era of incredibly cheap money, nothing that I can find looks like particularly good value. Just be wary of people posting gross yields from residential investments - net results can differ wildly!

As for your statement on capital gains, I would humbly submit that your goal is stated in terms of income - perhaps it's time to start focussing on that instead? If you keep buying negative RIPs you will only drive yourself further away from your goal...
 
Hi there, Interesting reading and well done.
Thanks Adelaide, but with hindsight we've made mistakes along the way: selling in the UK when we did and buying here to then see the dollar fall like a stone probably cost us over 1/2 a milly. Should have kept at least one UK rental - but was overly worried about getting out before paying any CGT, and had a short term loan to pay off.
Despite big gains and good decisions before that, I'm now very wary of messing up again, hence my paralysis.

I really appreciate your simple guides to gearing and trust arguments. I've read advice in favour of both and my heads spinning a bit.

Why can't you leave IPs in your own name to kids?
Leaving the rugrats something is an important feature because like any parents we would like to give them a leg up when the time comes.

If you avoid mortgage insurance, then you need loans of 80% or less.
You could by $2m of property with 80% loans.
Thats 5 properties at $400,000.
Rent return of $430 per week means you are around neutral geared.
If no loans on the property, thats $15000 interest not being paid x 5 properties = $75,000 income

If that would satisfy your income, then you don't need neg geared properties - head towards the positive ones.
If you want more cash - make it a mix so you can pull out equity and keep growing and keep more rent coming in to cover the neg properties.

So many options to take with property. It depends how much you want to be involved in.
a) happy to be pretty involved. the wife works 24 hours a week and I *ahem* work from home. we both love property and one or both of us would happily step back gradually from the day jobs if we could make IPs work for us.
b) $75k/ year wouldn't cut it by a long shot - it's got to be more than the $240k/year we currently make (unless we were drawing equity tax-free, in which case it would be circa $150k). That size portfolio I would like to aim for pretty quickly though, in 1 to 2 years time, as a starter pack. But my understanding is it will need to be negatively geared to get the capital growth we need to gain equity fastest. I'm not against that as spending $400k would leave a decent buffer to ride a few years out, and tweak the expansion plan after that depending on interest rates/prices etc.
c) by making it a mix wouldn't we just be compromising the goal of maximising capital growth within affordability constraints? I suppose it would ease affordability as the portfolio as a whole wouldn't be as negatively geared, but I guess my gut feel is 'in for a penny, in for a pound' on one approach - but perhaps I'm wrong and that will hamstring me?

Thanks again Adelaide.
 
Just to challenge this, with your net worth you would be able to sell your PPOR, invest the vast majority of the proceeds in whatever investment you wish and buy an average PPOR (or canal front or whatever floats your boat, so to speak!) pretty much anywhere else you like in Australia. The income from this strategy would see you both spending your time with your kids while they still want to spend time with you.

Of course, I can't convince my wife to go for that idea either but it does frustrate me - the ever improving PPOR roundabout only puts the carrot of mastering their own time further away from people who are immensely wealthy already. It's not a roundabout I enjoy.

Thanks for the response and for challenging my assumptions HiEquity, oh and I like your username :)

All I can say is that we're Londoners, love the Sydney weather - and 'anywhere else in Australia' is not gonna cut any mustard with Mrs SilverBear. She wouldn't even look further out than where we are on the LNS. Personally I could have gone bush and lived in the country on what we have already with a horse and a roo-shooter, but 'happy wife, happy life' etc

I think I can say there will be no bigger PPORs ever I hope, this will be our forever home until we downsize - so it's a case of get on with what seed capital we've got. We could wage-slave it for another 14 years, not worry about IPs and be pretty comfortable - we have a lot of family time and are really loving it.

BUT the wife will only get more miserable in her job, and we will both unfulfilled at not having tried our hand at property. It's something that would bring us closer working together - and with any luck elevate our finances to a stage we could enjoy some of the finer things in life instead of not feeling we've done enough to afford an overseas holiday. Yes I know that sounds ridiculous given our position, but I'm a Yorkshireman so can't help myself. I did promise her a holiday when we've bought the first IP!

As for buy and hold investments, I have NFI. In this era of incredibly cheap money, nothing that I can find looks like particularly good value. Just be wary of people posting gross yields from residential investments - net results can differ wildly!

As for your statement on capital gains, I would humbly submit that your goal is stated in terms of income - perhaps it's time to start focussing on that instead? If you keep buying negative RIPs you will only drive yourself further away from your goal...
But don't they *generally* become +IPs over time, and have better capital growth and hence better overall returns over say 10 years?

Anyway cheers for taking the time to reply, I'm delighted by the responses - hence me trying to keep up with all the posts.
 
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But don't they *generally* become +IPs over time, and have better capital growth and hence better overall returns over say 10 years?

I don't know. Neither do you. Neither does anyone on this forum. Future CG performance is hidden from all of us. But I can calculate yield today.

I have a commercial IP I bought with double digit net yields which has grown much more than any RIP in our portfolio over the last seven years. And provided us with oodles of income in the process.

Past performance is no indicator of future performance and generalisations don't make anyone wealthy. The gems lie in individual properties instead. Just look at Adelaide's $75k income figure (that you said was not enough) and calculate how long it would take to pay down the debt required to achieve it in his idealised example, on top of your PPOR debt. That's the likely "buy and hold RIP" scenario. Wage slaving for 14 years would probably be quicker...

If you want to do better than that, you're going to have to take some risks!

And I forgot to mention before - well done on getting to this point!
 
Properties is a bit like blue chip shares. It's hard to time to market, but you know when you're buying after it's gone up a lot (eg 2001, 2009, now) you're more likely to experience short-term capital losses. When you buy after it's gone down a lot, you're more likely to experience short-term gains (eg post GFC, post AFC, post SARs).

However in the long run, where a city has inflation, where a city's population continues to grow (at exponential rates), chances are its properties will go up in the long run and achieve higher highs (eg 2011 vs 2008, 2015 vs 2012).
 
PPOR: $2.4m (2013), $2.8m (2015). $1.4m mortgage with NAB after remortgaging 3 months ago to free equity for IPs.
Now have $600k ready to go in an offset account.

This concerns me. Hope you sought tax advice and have split the loan and made sure that no non borrowed money ever touches that offset account?
 
I don't know. Neither do you. Neither does anyone on this forum. Future CG performance is hidden from all of us. But I can calculate yield today

G'day silver, great post.

I would echo the above post, with your stated goals you have (in your ppor) one great asset but it's about income. I don't bag metropole ( have recommended them to several people in the forums so that's on the record) but they have a set formula of low yeild, high growth inner city property. Buying more 3-4%yeild properties will increase the work pressure at your point not decrease it.

Higher yeild properties could meet the goals here. Be wary of buying lots of really low priced regionals though, you will have loads of maintenance and work. Perhaps mix up a couple of well located house + granny flats or duplexes along with a block of units or 2 to really help the yeild. Major regionals or coastal Nsw within a few hrs of sydney will also give you a capital growth kick as the ripple is moving out from Sydney.

All the best
 
This concerns me. Hope you sought tax advice and have split the loan and made sure that no non borrowed money ever touches that offset account?
Hmmmm, errrrrr might have slipped up on that one Terry :eek: it's all in the one account. Surely I was better off lumping savings all in there to offset at 4.62% rather than having it a savings account earning 2 to 4% and paying tax?
Or do you mean I should have put the extra borrowing in a different LOC?

Why is it an issue?
Wish I joined SS 3 years ago!
 
Hmmmm, errrrrr might have slipped up on that one Terry :eek: it's all in the one account. Surely I was better off lumping savings all in there to offset at 4.62% rather than having it a savings account earning 2 to 4% and paying tax?
Or do you mean I should have put the extra borrowing in a different LOC?

Why is it an issue?
Wish I joined SS 3 years ago!

Potentially Huge issue considering the sums involved. You have destroyed the deductibility of interest and made a mixed purpose loan. Best to get this rectified, as much as it can be, before proceeding any further. get some advice.
 
G'day silver, great post.

I would echo the above post, with your stated goals you have (in your ppor) one great asset but it's about income. I don't bag metropole ( have recommended them to several people in the forums so that's on the record) but they have a set formula of low yeild, high growth inner city property. Buying more 3-4%yeild properties will increase the work pressure at your point not decrease it.

Higher yeild properties could meet the goals here. Be wary of buying lots of really low priced regionals though, you will have loads of maintenance and work. Perhaps mix up a couple of well located house + granny flats or duplexes along with a block of units or 2 to really help the yeild. Major regionals or coastal Nsw within a few hrs of sydney will also give you a capital growth kick as the ripple is moving out from Sydney.

All the best
Thanks for your post Matt, I took a peak at your website too :)

Maybe I've been lazy and let myself be suckered into thinking NG is fine and will generate a better total return over 10 years so long as I leave enough of a buffer to weather it. eg spend $400k now and leave $200k buffer (hence no more work pressure).
Maybe I've been lazy in thinking that a $600k seed will be enough to generate the returns I seek passively because we had such good returns over the last 13 years in London.
Maybe I've been lazy in not running the numbers portfolio/strategy-wise and trusting gut feel, telling myself that numbers are speculation anyway and it's better to just get going.
Maybe I've been lazy assuming that what worked in London will work here.

But maybe not!
Maybe a higher-yielding portfolio would have a lower total return over 10 years.
Maybe $600k would be enough - 3*$666k properties at 80%LVR with $200k buffer, double over 10 years to $4m, withdraw equity along the way and buy more relatively passively. Even without doing a detailed financial plan with sensitivity analysis it all seems to add up to muchos $$$.
Maybe paying a financial planner $2k for a plan that goes out of the window tomorrow would be a good idea (but I'd need some persuading lol)
Maybe the Sydney market will follow London and become differentiated from the rest of Aus, even more so than now in prime areas as those areas become relatively scarcer.

One members signature "don't wish things were easier, wish you were better" rings some serious bells in my head and the sentiment certainly appeals.
Mind you right now I just wish it was easier!
 
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