Target 2020! My retirement goal - some advice please?

[Thesnowyforest]

Hey sugar,

Nice work.

i think this thread http://www.somersoft.com/forums/showthread.php?t=32265 could be of real interest to you.

Can i also point you in the direction of this book: Motivated Money by Peter Thornhill www.motivatedmoney.com.au
Great book that explains the power of cashflow from dividend yielding industrial shares. Just dont take to much notice of his views on property investing. That is unless you can get a margin loan for 2mill

Hope this helps.

 

[ChasingSugar]

Snowy - awesome link to that thread and some great stuff in there. I think I should sit back, pay down a bit, and then in the meantime look into what this guy has done. Very similar stuff. Exciting!

Ski-Bum - you are right, need to sit tight. A question for you or others though, understanding that LOC is what I need to do the interest capitalisation, why can't i borrow against the portfolio as a whole, and place the funds in a mortgage offset account. My bank allows up to 95% LVR, and wouldn't this effectively be a LOC? EG: 100K borrowed and sitting in an offset account (0% interest) until I commence draw down? Anyone have thoughts on this one??

Thanks all for responses to date - this has been a fantastic learning curve!

 

[ChasingSugar]

A bit of an update!

Hi All,

So a bit of an update as it has been 18 months!

Since my original post I recieved plenty of advice - thanks all. The general concensus was 'sit tight, pay down debt, keep doing what you are doing'.

I've kind of done that, but have strayed just a bit. Unfortunately I couldn't help but make a lifestyle investment!!

So an update on the portfolio:

Current Value: $2.4Mill
Owed: $1.8Mill

There are now 8 properties in total, including my PPOR in the above. The latest addition was a Beach House on the 90 Mile Beach. I went down, loved the place, couldn't believe the prices....that old chestnut! Ended up with a rundown 50's shack, which $20K+ later is now a Holiday Rental revalued 50K more than costs of the purchase/reno. This is an 8 months part time time turnaround.

I saw it as a lifestyle investment! Rent it out, use sparingly for now until one day I can have it as a permanent holiday house - perhaps in 2020 and beyond!

So in short, all my bank evaluations have been completed in the past 3 months (hence the updated portfolio valuation). I have approval to get a LOC against the portfolio, and am in the works with the accountant to explore a capitalizing interest structure. Although they are saying it is not looking possible, due to recent rulings against people who 'want to pay down their PPOR sooner'. That was my plan - get the PPOR paid off, freeing up more cash and risk to be able to invest and drive more income.

Has anyone had any success with a private ruling (which I believe you need) to be able to capitalize interest?

The goal is still 2020. I think over the next 24 months property will be flat, although in saying that I have seen 5% or so on average accross the portfolio in the past 'flat/falling' year!

I don't have too many people of like minds to talk to - hopefully the above will help drive some further advice/comment?

Thanks & Regards!

JD.

 

[Property Meister]

6 IPs at 31! Congrats mate!!!!!!

 

[investor2009]

Looks okay to me. So long as you have paid off your PPOR, or at least knocked it down pretty low. When property isn't costing you anything and you have a small pos cashflow and are making $100k a year in equity then living on a small percentage seems more than reasonable to me. Whats worst case? Back to work at age 40? With no debt I could live the same lifestyle I do now with about $45,000 combined income because most of my pay goes toward good debt right now.

There are many people who'd be totally jealous of you at 40 not having to work when they're loaded with bad debt and can't even begin to imagine your life, let alone actually attempt to achieve it.

Please see my similar thread here http://www.somersoft.com/forums/showthread.php?t=76524

Hi there,

Thanks all for the prompt responses! I am glad I have asked as some good questions raised!

In terms of current use of funds, I've been buying and rennovating property!

Of the property we have, they were purchased (Year of Purchase/Purchase Price):

IP 1 - 2005/265K (was PPOR now IP)
IP 2 - 2007/110K
IP 3 - 2008/255K
IP 4 - 2009/150K
PPOR - 2009/365K
IP 5 - 2010/225K
IP 6 - 2010/230K

So the money has been spent on getting those in place and up and running!

The properties are in a mix of regional and suburbs, with reasonable rental returns (neutral) and annual average growth of 10% plus over past 10 years.

I am thinking paying down the PPOR will be the focus, and that was the extra 450 per month minimum. I was presuming extra funds would be used to purchase more property, or maybe some shares. Although property is my preferred method due to leverage capability. If I just focus on debt reduction, absolutely there will be extra funds! (I'm not that much high maintenance!).

In terms of at the tailend, 75K per annum for a couple seems ok based on all the online calculators. Remember PPOR will be paid off (theoretically). As to what to do - I'm not sure - will prob need to speak to my accountant or adviser for best thing... might be sell to reduce debt and increase cashflow?

 

[ChasingSugar]

Thanks Investor2009. I had a look and made a comment over on your goal. You're right - similar cicumstance.

I'm keen to know of anyone with recent ATO success on the capitalisation of interest?

 

[Deltaberry]

$1.8m equity is enough. $22k cashflow is not.

Throw $1.8m in to Telstra, get $200k franked dividend (equivalent to $300k income). Done.

 

[Rolf Latham]

I'm keen to know of anyone with recent ATO success on the capitalisation of interest?

in what way ?

ta
rolf

 

[jaycee]

$1.8m equity is enough. $22k cashflow is not.

Throw $1.8m in to Telstra, get $200k franked dividend (equivalent to $300k income). Done.

But would you ?

I like the dividend, but keep hearing about the past and not so certain future ?

Not to side track the thread towards Telstra, but as you mentioned it, do you see it in this case as plausable as a long term 'solution' for the OP ? I know no holding has to be permanent either, you can sell it and buy something else etc, just wondering what you might have had in mind.

cheers.

 

[soyabean]

I have been capitalising interest for years and keeping an offset account per loan. I don't think you need private ruling. I believe as long as you keep it clean not mixing private with business then you are ok.

 

[ChasingSugar]

Thanks for the reply - I was understanding that it was best to get a ruling so you are rock solid. They are wary of capitalising interest just to avoid tax.

I am wanting to avoid tax, but want to pay down my PPOR, securing that, and then providing me the ability to generate more income with lower risk, hence paying more tax from there.

 

[ChasingSugar]

Further to the above, this is what I got from one of my accountants:

We note that there are a number of private rulings on the ATO database which deal with capitalised rental property expenses and line of credit arrangements. The rulings seem to indicate that the capitalised expenses and the associated interest charges should be deductible under section 8-1 ITAA97 to the extent that the expenses relate to the derivation of assessable rental income.

We also note that some of the rulings also deal with Part IVA and confirm that Part IVA should not apply as long as there are sufficient non-tax reasons for capitalising the interest and other rental property expenses. While these rulings may provide some level of comfort, they cannot be relied on, so there is still a risk that the ATO could seek to apply the general anti-avoidance rules to your situation if the ATO thinks the arrangement is carried out with a dominant purpose of obtaining a tax benefit.

With further research, you will note the below:

http://law.ato.gov.au/atolaw/view.htm?docid="DXT/TD2011D8/NAT/ATO/00001"

Basically saying no, paying off homeloan sooner is not a reason. So not too sure where to go form here...

 

[Terryw]

Further to the above, this is what I got from one of my accountants:

We note that there are a number of private rulings on the ATO database which deal with capitalised rental property expenses and line of credit arrangements. The rulings seem to indicate that the capitalised expenses and the associated interest charges should be deductible under section 8-1 ITAA97 to the extent that the expenses relate to the derivation of assessable rental income.

We also note that some of the rulings also deal with Part IVA and confirm that Part IVA should not apply as long as there are sufficient non-tax reasons for capitalising the interest and other rental property expenses. While these rulings may provide some level of comfort, they cannot be relied on, so there is still a risk that the ATO could seek to apply the general anti-avoidance rules to your situation if the ATO thinks the arrangement is carried out with a dominant purpose of obtaining a tax benefit.

With further research, you will note the below:

http://law.ato.gov.au/atolaw/view.htm?docid="DXT/TD2011D8/NAT/ATO/00001"

Basically saying no, paying off homeloan sooner is not a reason. So not too sure where to go form here...

see also TD 2011/D8
http://law.ato.gov.au/atolaw/view.htm?docid="DXT/TD2011D8/NAT/ATO/00001"

 

[ChasingSugar]

Update...and request for some further advice! Please!

Hi all,

It has been 2.5 years since my first post, and much has happened. I'm sitting down reviewing my portfolio, and was hoping for some ideas on a way to keep pushing for my goal of 2020!

In short, as an update, I'm now 34, have 3 kids and 8 investment properties! I may have a problem (the investments - not the kids! )

I had some valuations completed 2 months ago through my banks, and the portfolio and values now look like this:

PPOR: Value $503K Owe $428K

Investment Properties (8): Value $2.2Mill Owe $1.9Mill

Superannuation (Combined): $100K (invested in sharemarket - moving soon to SMSF for property+).

Taking a different tact, I am wondering if I should consider selling down a few properties in order to pay off my PPOR sooner.

Breaking down my investment properties (Year Purchased/Purchase Price/Bank Value Now):

IP 1 - 2005/265K/390K
IP 2 - 2007/110K/190K
IP 3 - 2008/255K/307K
IP 4 - 2009/150K/190K
PPOR - 2009/365K/503K
IP 5 - 2010/225K/265K
IP 6 - 2010/230K/260K
IP 7 - 2011/147K/175K
IP 8 - 2012/352K/355K

We also have some debt for investment expenses (buying/rennovating/costs of running), totaling around 195K. This is in a compounding LOC.

The bank valuations I believe are conservative on a few of the properties. And some of the numbers above are rounded/slightly different. Don't hang me up to dry if the numbers aren't spot on collectively!

I am considering selling Investment Properties 1, 2, 3 and 4 to help pay down our PPOR. This would basically reduce the PPOR mortgage down to around $150K, freeing up considerable cashflow for other investments (Shares?).

It would leave me with a heap of eqiuty in the PPOR and 4 investment properties. I think I would then have considerable scope to buy elsewhere.

Is this a solid plan or should I just let it roll into 2020 as is, working on paying down the PPOR 'old school'.

Thanks in advance!

 

[Brady]

Hi all,

It has been 2.5 years since my first post, and much has happened. I'm sitting down reviewing my portfolio, and was hoping for some ideas on a way to keep pushing for my goal of 2020!

In short, as an update, I'm now 34, have 3 kids and 8 investment properties! I may have a problem (the investments - not the kids! )

I had some valuations completed 2 months ago through my banks, and the portfolio and values now look like this:

PPOR: Value $503K Owe $428K

Investment Properties (8): Value $2.2Mill Owe $1.9Mill

Superannuation (Combined): $100K (invested in sharemarket - moving soon to SMSF for property+).

Taking a different tact, I am wondering if I should consider selling down a few properties in order to pay off my PPOR sooner.

Breaking down my investment properties (Year Purchased/Purchase Price/Bank Value Now):

IP 1 - 2005/265K/390K
IP 2 - 2007/110K/190K
IP 3 - 2008/255K/307K
IP 4 - 2009/150K/190K
PPOR - 2009/365K/503K
IP 5 - 2010/225K/265K
IP 6 - 2010/230K/260K
IP 7 - 2011/147K/175K
IP 8 - 2012/352K/355K

We also have some debt for investment expenses (buying/rennovating/costs of running), totaling around 195K. This is in a compounding LOC.

The bank valuations I believe are conservative on a few of the properties. And some of the numbers above are rounded/slightly different. Don't hang me up to dry if the numbers aren't spot on collectively!

I am considering selling Investment Properties 1, 2, 3 and 4 to help pay down our PPOR. This would basically reduce the PPOR mortgage down to around $150K, freeing up considerable cashflow for other investments (Shares?).

It would leave me with a heap of eqiuty in the PPOR and 4 investment properties. I think I would then have considerable scope to buy elsewhere.

Is this a solid plan or should I just let it roll into 2020 as is, working on paying down the PPOR 'old school'.

Thanks in advance!

How are properties 1, 2, 3 and 4 currently performing. I understand probably not that well in CG due to the valuations..
But what's the cash flow on the properties?
Will there be CGT?
Whats the pontential for these properties?

 

[handyandy]

You will need to factor in some selling expenses and CGT before you can count it against your PPOR

Overall what you propose is not a bad strategy from the debt on the PPOR aspect. This is particularly true if you then redraw to PPOR equity to utilise in further investing.

Actually if you add you $1.9 mil debt and the $195 that you have run up on the LOC this comes to $2.095 mil which is not far of your total stated equity.

Maybe the $195k is already in the $1.9mil? Otherwise I can't see how the LOC is secured.

With your idea of changing to a SMSF I have just started using super accounting to manage my SMSF. They charge a flat fee $1150 - $1475 depending on the level of service. So those are not bad fees when your super fund has a limited balance. So far I have been very impressed with their responsiveness.

http://www.superaccounting.com.au/

Cheers

 

[Rolf Latham]

as a separate issue

are all your loan facilities with the one funder ?and maybe crossed as well ?

It looks like you arent using any form of debt recycling which could hammer that non deductible debt away pretty quickly

ta
rolf

 

[skater]

Back in 2010 your debt on the PPOR was $380k, now it is $428k. How is it that your non-deductable debt has gone up?

 

[Terry_w]

How are the houses owned?

If some are in VIC then you should consider using a strategy involving spousal sale. This could work well if you are able to do renovations and increase equity quickly - get wife to own initially and then sell to you maybe. Nominal stamp duty and little CGT. Use the proceeeds to pay down PPOR loan.

Selling outright should also be considered and you may want to sell one property per financial year to reduce CGT.

Capitalising interest should be considered as well as borrowing to pay for IP expenses.

 

[beachgurl]

Congratulations on your investing to date. If I were in your position I'd hold onto the IPs until you are ready to retire and then pay down your home. The income you are gaining from the properties would keep your job money free for other investments. I know that everyone says to knock down the non deductible debt but does it matter so much if you can afford to keep all properties? You would go backwards before going forwards by the selling costs of the IPs and would pay higher cgt with the profits being added to your current annual income.