The end game

[HotRod]

The thing with living off CF is that your returns ATM might be based on IO loans, which is good and dandy whilst still working.

Once you enter the end game and carrying any amount of debt against the IPs they will probably be P&I as it would be hard to get the IO period extended because your serviceability drops once you stop working (in the bank's eyes).

But at that stage either the rents have increased and you could have paid down some debt, so it might not be so much on an issue.

Just sayin'.

 

[Rixter]

Once you enter the end game and carrying any amount of debt against the IPs they will probably be P&I as it would be hard to get the IO period extended because your serviceability drops once you stop working (in the bank's eyes).

So the idea would be to enter the end game & not let your DSR hit the wall (in the banks eyes) and the status quo shall remain.

 

[landlubber]

The end game is here...

We entered "the end game" world in 2006 and chose the LOE path. So we're six years into it and "still dancing". We've always been neg.geared and still are. I think to make "the Jan plan" work you need minimum two good property cycles. During the first you use the equity growth to acquire your portfolio. During the second you "sit quietly" and grow your equity. The idea is to double it...right? So you might end up with IPs that cost you $4M and are worth $8M...say. The way our lender solves our servicibility/repayment issue is they "lockup" a chunk of our LOC into a term deposit. This gives them guaranteed income should they have to ever liquidate our position. Clearly, we hope this never happens ! The neat thing about being overall neg geared is you "generate" carried forward tax losses. Then you use these to offset the CGs. Since losses are "dollar for dollar" and you get a 50% discount on CGs...the math seems pretty compelling to me. We just turned 60 and now we're told we can put money in our SMSF in pension phase and the income generated is non-assessable. So we can have income and it won't "reduce" our neg grg losses. We still own 30IPs are getting abit sick of the admin load. So we're selling a few now, using the tax losses to negate the CG and putting the cash into the SMSF to generate non-assessable $$$. That's the theory anyway ....
I hope I've explained myself clearly. Good luck !! LL

 

[lyndon01]

The neat thing about being overall neg geared is you "generate" carried forward tax losses. Then you use these to offset the CGs. Since losses are "dollar for dollar" and you get a 50% discount on CGs...the math seems pretty compelling to me.

It sounds like you are using income losses (interest) to offset capital gains? How does this work? Are you able to treat the interest as capital losses somehow?
Cheers

 

[Rixter]

It sounds like you are using income losses (interest) to offset capital gains? How does this work? Are you able to treat the interest as capital losses somehow?
Cheers

If your tax deductible expenses are greater than the income earned for the year the difference is carried forward as a tax credit to be used against the future years income. Tax credits can be carried forward until such time as they have been completely written off.

If you sell an IP you have to pay CGT. Those tax credits go towards reducing one taxable income which in turn reduces ones CGT payable when an IP is sold.

 

[MMM]

Thanks all for your insights.

Landlubber, this statement is interesting;

The way our lender solves our servicibility/repayment issue is they "lockup" a chunk of our LOC into a term deposit. This gives them guaranteed income should they have to ever liquidate our position.

These are the things I am looking for in order to understand how all the equity is manipulated to fund lifestyle without eroding your asset base which needs to be nurtured and grown.

It seems to me if you decide to live of equity and want to protect and grow your asset base the only real risk you need to manage is your business partner - the bank.

Unfortunately, I don't think I have enough time to see through two cycles before the end game is started so I think my investment portfolio will need to include other asset classes.

3M

 

[travelbug]

I don't think it's too late.

At 50 (2008) I thought I'd left it to late but started buying frantically (but well) in 2009.
After 3 years our net worth has grown by over $600K.

This has involved buying under market and doing renos (for some) thus increasing equity and cash flow. Last year we were CF+ after tax. With interest rate cuts this year we are also CF+ (just) before tax.

Most of ours are in Sydney and capital growth has not been major (except what we manufactured ourselves). I am optimistic that I will see some more CG in the next few years which will aid our retirement.

 

[landlubber]

Rixters got it !

Rixters explanation of how carried forward INCOME tax losses (credits) are used to offset/negate future CGT is perfect. Many people don't understand this, because they are confused by the fact that it dosn't work "the other way around". i.e. you cannot offset capital LOSSES against other income. You need to get your head straight on that point. But just consider the "formula" for working out your CGT and that should make it clearer.

Time ?? We bought our PPOR (still live here) in '86 and used the built up equity in it to fund the 20% deposits on IPs. Bought first IP in '96 (age44). We went "full time property" in 2006 and bought our last IP (#35) in 2008. We specialised in "buy dump - do reno". Bloody hard work for 10 years. No golf. No footy. Just day job and week-end renos. Some weekends we'd get so dejected we'd just sit in Mackers and eat chips and drink coffee. Hahaha ! The good ol' days !

Just remember, your life expectancy is now mid-80's so if you're 50 you still have 40% of your "time" ahead of you ..and it has to be funded somehow. Scary thought huh ? Better get on with it, cause I tell you, at 60, I don't go up ladders like I did in my 40's. Health is the final frontier !!
LL

 

[MMM]

I am 45 this year and just starting out. Well, I have all but paid off my PPOR which I guess is a start but have not been able to start buying IP's because of servicability challenges. Basically not enough income. Not only that, over the last ten years I have tried to start businesses in an attempt to improve my income only to end up with a heap of bad debt. I have recently gone back to working the JOB in order to appease my financial partner - the banks.

Because of this I have recently refinanced and shifted the equity sitting in my PPOR into an investment operating account as an LOC. I won't be able to go on a spending spree but I can probably buy a good IP (500K) with reno potenital and have enough to hold it for about 3 years. I am also renovating my PPOR to add value considering I see this property as part of the whole portfolio. I should be in a good place in two years time to pull the trigger again with the second IP.

My portfolio growth will be dependant on CG given my income options are very limited.

Realistically, I think I need to push this to about 4 IP's to have any chance of playing the end game in ten years from now. it would be nice but I think I will be working the JOB until about 60.

3M

 

[landlubber]

3M, You're in THE mining boom state. You're still young. Perhaps a career change is in order to improve your income ?? Lot's of money changing hands over there. Perhaps sell your PPOR, clear out that debt. Perhaps rent and invest is a consideration for you. Any money in super? Can you identify undervalued IPs/ regions WITH potential.....? Just some ideas.
LL

 

[lyndon01]

Many people don't understand this, because they are confused by the fact that it dosn't work "the other way around".

Exactly what confused me. It makes perfect sense though, I just hit reply before actually thinking

 

[china]

I think that ultimately the goals of the end game is very simple. You need to own your PPOR and pn top of that, at today's dollars, you need 2 to 3 million in income producing assets. This 2 to 3 million could be cash, super, shares or property yielding at least 5% per year gross in passive income pre-tax. When you have the 2 mil outside ppor, then you know that you can retire comfortably.

 

[MMM]

Thanks all for your insights. It is appreciated.

 

[Deltaberry]

If you rely on 5% yield to reach your end game, you'll probably never reach it. Last business we were involved in was some 200% yield.

 

[china]

If you rely on 5% yield to reach your end game, you'll probably never reach it. Last business we were involved in was some 200% yield.

I use 5% as the lowest return that can be achieved even by someone who puts their 2 mil in a term deposit. For many people out there, myself included, we have problems achieving yields beyond 5%. This is why I peruse this forum to look for ideas to increase yield on capital whether it be through share or housing investment.

 

[landlubber]

Yep - 5% is a good benchmark. You may well be able to "hit a home run" and get 200% return ...but let's see you do it consistently when you're "old and grey". There are very few rich entrepreneurs out there. Most make it and then lose it.
LL

 

[MMM]

I use a 5% minimum annual CG in my 'what if' spreadsheet for property investing across the portfolio. I use this as the worst case scenario.

Ultimately, if your total holding cost % plus inflation % is lower than your total annual CG then you are making money on paper.

Are we saying a 5% portfolio CG per year for a property investing business is unrealistic?

3M

 

[china]

I use a 5% minimum annual CG in my 'what if' spreadsheet for property investing across the portfolio. I use this as the worst case scenario.

Ultimately, if your total holding cost % plus inflation % is lower than your total annual CG then you are making money on paper.

Are we saying a 5% portfolio CG per year for a property investing business is unrealistic?

3M

I think that a lot of resi property investors would struggle to make 5% CG in current times. Clearly, there is a minority that do but most do not. Almost certainly, the resi investors that achieve greater than 5% CG in recent times would have to manufacture their own CG. Gone are the days where you can just hang on to the property and let natural CG growth do the rest. In my calculations, I think that if you are investing in shares and property, you really need to achieve above 5% CG because you are taking greater risk than a term deposit. Therefore, you need a greater reward. Otherwise you are wasting time, jeopardising your money and future.

 

[Deltaberry]

Yep - 5% is a good benchmark. You may well be able to "hit a home run" and get 200% return ...but let's see you do it consistently when you're "old and grey". There are very few rich entrepreneurs out there. Most make it and then lose it.
LL

If you think with the 5% mindset, you'll be happy and jump up and down when you see 7%. Hence my comment "good luck hitting the end game".

We might not hit 200% consistently, but I should say with cashflow like that coming in (and various other ones averaging 300%+ pa) it's very easy to fund a few failed ventures which we've had our fair share of (perhaps over 30?).

An entrepreneur makes it, loses it, then makes it again. A one shotter is usually a gambler.

 

[joeExpat]

I use a 5% minimum annual CG in my 'what if' spreadsheet for property investing across the portfolio. I use this as the worst case scenario.

5% CG is a very high worse case scenario, fairly optimistic really.
Worse case scenario would be more like -3% for the next 10 years.