Who lives off rental income alone

[MichaelW]

+1 for respectfully disagree...

In fact, this uber-conservative strategy is probably the best if you kick it hard early and get a few paid off IPs under your belt. The massive cash flow positive outcome means your portfolio is self-servicing and you can acquire more even when the bills roll in and you get dependents and have to reduce the amount of your personal income you devote to the portfolio. If you lever too high too early and the bills roll in then you're in much worse shape. Only downside which is covered already is its a tax ineffective strategy. Most investors I've met tend to maintain an LVR around the 50% level which makes the portfolio marginally positive and they buy again when that LVR starts dropping and the cash flow gets too high and tax starts to bight. Keep doing that and you've got maximum exposure to the market whilst still being cash flow positive and getting the maximum benefit from capital gains. When it comes time to live off your accumulated wealth then you sell down one or two and turn it into massive cash flow positive, albeit tax ineffective. But by that stage you're in retirement and consumption mode, not growth mode, so of course its all about income (which will be taxed).

Cheers,
Michael

 

[oracle]

I don't know why everyone sees paying tax as such a bad thing! If you are paying tax, it means you are earning a profit - which is the reason for investing at all, isn't it? If you are really so against paying tax, then the easiest way to avoid it is don't earn an income. Personally I would rather have a $200k p/a income and paying maximum tax, then an income in the lowest tax bracket (say $30k p/a). If you really felt you were simply being too successful and earning too much money from rent well I guess you could always go and donate to charity and get a tax break that way.

Besides, think of what your tax is going towards. Who here has never got a medicare rebate, used a hospital, attended school / uni, used the roads, got some kind of payment from centerlink?? Even if you never did / have (in which case you must be living in a cave somewhere), what about your children, or future children, or grandchildren. Sure the govt cann please everyone all the time (and you may feel that they REALLY get it wrong sometimes) but it is a nessescity to keep or society and country running in a way that puts us way ahead of others (such as the USA, for example), and gives us all such great oppertunities in the first place.


Of course it is fine to take advantage of as many tax breaks as you legally can, but so long as everyone else is paying under the same messed up system, I don't see the point in avoiding a profit just to avoid tax.

The point I am trying to make is if you are earning 200K and paying around $70K in tax. Wouldn't it be much better to have that 70K working for you by you being able to claim the amount against legitimate investment loan?

Almost, every book that I have read about property investments recommend using leverage as it can be a great tool to build wealth in short timeframe. If you are conservative than by all means have a low LVR of around 40%-50%.

Cheers,
Oracle.

 

[ok180]

What are we disagreeing with?

I agree that it's a good thing to do when your in your late teens - early twenties (i did it) but you have to have a life balance too.

the essence of what im getting at is that eventually once your out of home life's other needs get in the way and it makes it hard to slam down loans.

 

[MichaelW]

Yep, agree with that.

And, just for the record, I'm more an advocate of marginally cash flow positive and an LVR a bit above 50%. So long as I'm around neutral then I'm happy as I've maxed my exposure to the market. I'm not a big fan of getting my debt to zero ASAP as it seriously reduces the amount of income servicing the loans due to the taxed component as well as reduces the amount of capital gain and therefore equity creation you get. Hold as much as you can, but don't over-stretch your cash flows. That's my strategy and I think a common theme for most of the writers on the topic. Plus they add little tweaks like add value to accelerate.

Cheers,
Michael

 

[Nikolina]

Would be nice to also see the amount of tax paid when you have 21 incomes. I am assuming that all properties are bought under the one name.

The strategy Nikolina has adopted is surely one of the lowest risk strategy. But once her income from employment + rent reaches highest tax bracket you will be paying a lot of money in tax and that is a fact!

Cheers,
Oracle.

oracle,

Paying tax does not bother me one single bit whatsoever! Put it this way just as an example lets just say that on each one of my 5 properties i am getting 25k rent p/a. 25k x 5 IPs = $125k. So lets just say half of that $125k has gone "wasted" on tax. Who cares, in the end i will still have $62k p/a to spend not to mention my work income and not to mention the equity i would have. Also keep in mind their are ways of reducing paying tax.

 

[Nikolina]

This assumes that each property is paid off before its income can be used for the next one.

battler,

Like i have previously said my first IP is just about paid off. With every purchase i make/have made i will make sure i have more then half the purchase price in cash. Won't take long to repay the banks for each IP this way.

 

[Nikolina]

It works for you now because your 23 living at home with the parents, little to no expenses. Eventually life will get in the way (marriage, PPOR, kids, cars, bills, groceries, etc) and your going to struggle to keep that strategy up. I guess you could live with the parents indefinitely....ahem.

Im 28 now and i used to do the same thing when i was younger, paying down debt. Nothing wrong with it when you can. It allowed me to buy a couple of IP's and a block of land which i built my PPOR on. The thing is i made sure along the way i lived a life too, i went overseas for a while, wen't out on weekends, had nice cars etc, I experienced "life" in other words and i wouldn't trade that for double of what i have now. Surely we can't invest and have sacrifice our life completely!

I disagree,

It will continue to work for me. As i have previously mentioned if i was to move out tomorrow and buy a PP0R, my rental return from IP number one would cover the fortnightly repayments on my PP0R.

I too am also "living life" Im 23. I have a nice car, went overseas the Novemeber just past, go out every weekend clubing, cruising etc. I do all the normal things 23 year olds do, not to mention the WICKED all nighters i manage to pull off

It is possible to do have/both as you know.

Nika

 

[Nikolina]

Great work Nikolina,

I actually think its a great strategy. Conservative, sure, but great.

For those that still don't get it, consider it this way...

Her first IP has 2 incomes servicing it. Hers and the tennants. That's a 2:1 ratio of incomes to indebted properties.

Her second IP has 3 incomes servicing it. Hers and the two tennants from both IPs all servicing this third property. That's a 3:1 ratio of incomes to indebted properties and a much quicker pay-off period.

By the time she's onto her 20th property she has 21 incomes servicing that property or a 21:1 ratio of incomes to indebted properties. So, how quickly do you think that 20th property will be paid off with 21 incomes servicing the debt?

Its an exponential growth curve. The more she gets the faster she pays them off and the faster she can acquire more. I've known of several investor mates who've applied exactly this strategy to very good effect. AND it has the added benefit of being virtually risk free. She'd need 20 families to simultaneously become unemployed and renig on their rental commitments for that 20th property to become at risk. Just ain't going to happen. She's rolling in cash flow and accumulating and paying off IPs faster than she can spot the good deals.

Great work mate!!

Cheers,
Michael

Thanks Michael, That was very well said. Could not have put it any better myself. Absolutely agree

 

[battler]

Like i have previously said my first IP is just about paid off. With every purchase i make/have made i will make sure i have more then half the purchase price in cash. Won't take long to repay the banks for each IP this way.

Nikolina,

I fully understand, and it is a great process that we have done for over 20 years.

My comment was to clarify Micheal W's post.

His post says, once you buy the next one, the income from the first one and second one plus your income would all be paying off the third one.

This left nothing for any shortfall that may have existed in the first one.

 

[Nikolina]

+1 for respectfully disagree...

In fact, this uber-conservative strategy is probably the best if you kick it hard early and get a few paid off IPs under your belt. The massive cash flow positive outcome means your portfolio is self-servicing and you can acquire more even when the bills roll in and you get dependents and have to reduce the amount of your personal income you devote to the portfolio. If you lever too high too early and the bills roll in then you're in much worse shape. Only downside which is covered already is its a tax ineffective strategy. Most investors I've met tend to maintain an LVR around the 50% level which makes the portfolio marginally positive and they buy again when that LVR starts dropping and the cash flow gets too high and tax starts to bight. Keep doing that and you've got maximum exposure to the market whilst still being cash flow positive and getting the maximum benefit from capital gains. When it comes time to live off your accumulated wealth then you sell down one or two and turn it into massive cash flow positive, albeit tax ineffective. But by that stage you're in retirement and consumption mode, not growth mode, so of course its all about income (which will be taxed).

Cheers,
Michael

once again Michael, verry well said. Couldn't agree more.

 

[jaycee]

Would be nice to also see the amount of tax paid when you have 21 incomes. I am assuming that all properties are bought under the one name.

The strategy Nikolina has adopted is surely one of the lowest risk strategy. But once her income from employment + rent reaches highest tax bracket you will be paying a lot of money in tax and that is a fact!

Cheers,
Oracle.

and the smae would occur if you adopted another strategy ASSUMING thta you bought without thinking in the not the best name...

You pay tax, or use th e$ for more accumulation - once you stop accumulating, shoudl you have 21 properties, would you not in theory pay tax ? I'm sure there sdidfferent things you coudl do to chang emthat.

Are you so sure those things are out of reach to Nikolina's strategy ?

5 yrs for me between IP 1 & 2 anyway.. imagine if I had paid IP 1 off during that time - would it really be so bad ? I now have about $600k debt, when I could have had $370k owing only - is that worse ?

Pat the girl on the back for doing so well.

 

[sue78]

not us but my MIL has been a self funded retiree for over 10 years. She's I think 56y.o.

She lives off the rental income from 4 houses which are worth over $500k each excluding her own ppor. She also owns a commercial shop and I guess probably collecting about $600p/w too. She's from UK and is here on the old self funded retiree visa which is now obsolete.

In addition, she owns a flat in Hong Kong. A big detach in England and 2 terrace houses (I think), one which has been converted to a chinese take away. She collects like GBP400 a week rent but is in the process of selling the leasehold for GBP100k.

All of the properties are unencumbered.

Yet she still complains about bills. She pays tax, rates, insurance, mgmt fees etc and after all of that, there isn't as much left. But even so she would still rather this way than borrow money. At least she still has capital growth. Her houses are rarely empy since it's in a highly desirable rental area.

How did she become wealthy? she owned chinese take away business in UK. In those years there wasn't as much competition. The Brits love take away food.
On a Saturday night you could make over GBP2k..really rolling in the money. You could buy 1 house a year in Oz. But t/a business is hard work. My other aunty's networth is double my mother in law's and she's still working 15 hr days.

She's got 11 grand kids which keeps her busy, happy..she's not greedy for more money. All her kids are successful and spoils her rotten. My bro in law came to visit over Xmas and bought her a 50" plasma and a new couch and vacuum. We took her to the USA with us for 3 weeks. Her daughter gave her $1k spending money in US. This is becauses he's our mum..it doesn't matter that she's rich or not but because we want her to be happy and for everything she has done for her kids.

so it's nothing new...work hard, save and buy...the most straight forwrad investing plan. do not borrow a cent.

my bro in law is 30y.o and has saved up about $500k I reckon well that his price range and he's not borrowing. But it's not hard when you are a bachelor earning 6figures + bonuses. He's smart graduated top 1% MBA club...you would think he would know more about properties and investing but very conservative. I think the hwole family are....they don't believe in debt and borrowing.

 

[Bill.L]

Hi all,

Nikolina, The point some people are trying to make on the tax angle is not about when you have your 5 properties generating $25k in rent, but getting to that point.

An example with numbers is the best way to illustrate this..

Let's say you are getting $20k in rent from properties 1 and 2 to pay off the last $100k of your loan on property 2, plus the $50k you can save from the $85k income (not really average but you used this figure before).

If your property expenses were $6k interest and $8k PM fees, rates, insurance, repairs then $4k depreciation, out of your surplus from the rents $40k-$18k you have $22k left that will be taxed at 40c in the dollar.

This means you pay $8.8k to the ATO out of your remaining rents leaving only $17.2k from your original $40k rent to pay off the loan, which is why you need to have the massive $50k of your own money saved per year to have this strategy work.

What some (myself included) have suggested is that you are able to purchase more properties quicker by using your savings as deposits (even up to 50%), but not pay off the rest of the loan, until you decide to 'retire'.

You are able to purchase more properties this way, perhaps many more than you need for 'retirement', yet when you decide to sell half of them (or whatever number), the maximum in tax you will pay is 22.5c in the dollar in CGT (assuming current rules continue).

You will get to your goal much quicker with hardly any extra risk by using the strategy of buying more properties earlier on, instead of paying each off separately, with the time drag caused by the tax you pay earlier, plus the increased cost of the properties by delaying the purchase of them.

I still think you would do well to read Jan Somers books, and read threads like Brenda Irwins story....

http://www.somersoft.com/forums/showthread.php?t=8756&highlight=ipswich

bye

PS Whatever happened to Brenda?? She hasn't posted for a while.

 

[vincenzo]

Well I'm convinced.

This thread drift has turned out to be so much fun, I think it's about time a Dump On Tall Poppy sub-forum was created, where we can create an official Lets Bash Nikolina thread.

 

[andrew_de_a]

I don't see anyone "bashing" her in this thread, merely a discussion on alternate styles of investing.

For the record I'm not a massive advocate of her style, but each to their own.

 

[RumpledElf]

There's no difference between 21 rental incomes adding to X and one PAYG income also adding to X. Would you tell people to take a lower-paying job to pay less tax?

Its a good, safe, very risk-averse strategy.

 

[vincenzo]

I don't see anyone "bashing" her in this thread, merely a discussion on alternate styles of investing.

For the record I'm not a massive advocate of her style, but each to their own.

Maybe it's not bashing, but I think this thread wasn't meant to become a debate with multiple members nit picking at one member's investing and even speculation about her social life

Maybe the poll options should be changed to:

1) I approve of Nikolina's investing.
2) I don't approve of Nikolina's investing.
3) I'm not a massive advocate of Nikolina's style.
4) I own some secateurs and I can see a poppy.

 

[Bill.L]

Hi all,

vincenzo, I think a lot of things have been raised the Nikolina may not have thought about being young and relatively new to the PI game.

Her strategy is safe, but not necessarily the safest approach to reach her goal. If the property market boomed while she was paying off her second property, instead of using equity to purchase say a total of 4 properties, she may end up paying a LOT more money for the third than she otherwise would have, meaning that it could take an extra 3 or 4 years to pay off that third property.

Also during the extra time to pay off property, her circumstances could change and she doesn't have the ability to put an extra $50k in per year.

This thread is about trying to help Nikolina understand the different possibilities, the poll as such is pretty irrelevant and I have not even looked at the results as it is so pointless. (not that I would let my bias against polls come out )

bye

 

[jaycee]

Agreed with Vincenzo.

If people didn't mean it to sound that way, perhaps they should brush up on their delivery

Speculating about her social life was a needless jab.

If it were advice, it would have been, "don't close yourelf off to hearing other strategies..." but people pretty much opened with "your strategy is no good, its a wrong strategy, listen to us". Which is why the lady 'defended', or explained, her previous posts and her position & then people would come back picking the details apart with speculation - I'd rather have a life as well - what do you know about this person's life ?

Bill, in 5 yrs hse paid of a whole ****ing house ! I can't see what the helll is wrong with that... I couldn't pay off house in 5 yrs if I treid, so this negative gearing LVR balancing game is the way I choose to go... If I buy a house every 3 yars, in 15 I'll have 5...with 60%-80% LVR.. she buys 1 every 5 yrs cash will have 3 with no LVR... which equates to 6 with 50% - that's AHEAD of me... actually each house of her houses will get paid off quicker than before,

yr 1: 1 house.. yr 5: 2 houses..year8: 3houses... year 11: 4houses.. year 14 5houses... with 0% LVR...... I'm sure as someone grows they can see other opportunties nd adopt them if they feel they are good for them - even Nikolina.. Bu teven if she doesn't the results look pretty damn good to me ! I am sure she can look at what to do aboutpesky income tax if its such a problem too.

Perhaps she does not have to do what you & I do !

I can say good luck to her about that, others seem to have sour grapes and point out things like "Youre only able to do this because of this & that, wait till reality sets in / what are you gonna do when this happens " - whatever she will do, she will most likely be in a better psoiton than me if something happened... I can admit that, others seem to have a difficulty with it.

 

[garygoodbloke]

What is this, year 9 all over again?

People are pretty resilient and can stick up for themselves if they feel "basked" on an internet forum. As well, some people read far too much into posts here and find all sorts of petty motives and slights where none probably exists. In the end, who cares?

Back to what Nicola is doing, I'd have to say that I'm naturally attracted to the idea. I'm not someone who likes having debt. I've recognised though, that, rationally, it's a necessary evil. As an investor, I have to look at and manage the numbers and I have to use my ability to do so to create wealth.

Of course, I need to tailor it to my SANF. Having said that, sometimes the things that worry us can be irrational or immature. That's not to say they're any less real to us, but they can still be overcome.

I could decide to visit every country in the world but let my fear of flying limit me to only take boats, buses, cars and trains. That's fine, but I'd then have to calmly ask myself, what is it costing me to hold on to my fear of air travel?

At some point I can say that it's just who I am and I refuse to change (idealism followed by righteous indignance) but at the end of the day, if I want a certain result that there will be certain things I'll need to sacrifice and I'll need to evolve in different and challenging ways.

Now, as for Nikolina, it sounds to me like she's already considered debt, CG, CF, etc... and all the angles and has made a decision for herself. Fair enough, and more power to her. I'm not putting her in the category of people who haven't done their investment strategy due diligence. For her it (and please correct me if I'm wrong Nikolina) but it simply comes down to her having decided that she'd rather take the low risk over the tax benefits and potential capital gains. That's really a personal decision we all have to make and not one you can really challenge as it is related to personal values.

For me, I'd love ot go this way, but my objectives coming into this are to avoid working the 6-7 days a week and to use my mind to find ways to leverage my time, energy, money and other resources for the biggest possible gain.

Not every billionaire has used massive debt (leveraging their seed capital) but they've all heavily leveraged something to get where they are, whether it be a specific skill (Gates), their analytical skills, frugality and discipline (Warren Buffet) or some other attribute they either had or developed.

So what I'm saying is that for me, I'll have to leverage everything in my arsenal to get to where I need to go with maximum efficiency and minimum waste. If another person has a different time frame or other ideal way to get to where they want to go, then that's a personal difference and useless to try to analyse.

Oh, and I also fall into the camp of people who think tax should be a secondary consideration in wealth creation. But I wouldn't say I enjoy paying it when I see the ridiculous amount of waste, inefficiency and other behaviors that ir sponsors. For example, paying $5 for a return ticket from Bondi Junction to the City and the sheer incompetence of cityrail and the NSW government makes makes me hate giving money to those bureacratic idiots. Especially when I lived in Korea (with income tax around 3-5% on average) and could pay $2 to take a subway trip that lasted 2 hours... makes you question why it's necessary for our nation to pay such high tax.