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In this week’s episode, Dave, Cate and Pete take you through:
- A mixed bag – investment, holiday house and future long-term home. Can we have it all? This case study follows the journey of James and Amanda who had a number of boxes to tick for their next property. They weren’t sure if they should purchase a straight–forward investment property or if they could achieve an investment property purchase in a beachside location which could double as a holiday house and maybe even eventually become their long-term future home when it comes time to downsize. Another ingredient to add to the pot was that they didn’t want to compromise their current lifestyle and for extra spice, ideally this property would work towards achieving their income goals for retirement.
- Introducing James and Amanda – financial overview and goals. Dave shares James and Amanda’s key circumstances and of course, their lifestyle and property goals which are driving their decision. With two teenagers in private school and very little surplus cash flow, the key conundrum to unravel was how to complete the next purchase without compromising their current lifestyle and saving enough cash to have family adventures. Their initial preferred price point was initially determined to sit around $1.2M, however James and Amanda realised that they would be hard–pressed to find a property they would enjoy as a holiday house and a long-term future home.
- Modelling the scenarios. Two scenarios were modelled for James and Amanda, one at their preferred purchase price–point of $1.2M and the second for their revised, (and more realistic) price point of $1.4M. Dave explains how, (with some clever mortgage strategy and borrowing capacity finesse), the $1.4M price point was achievable, despite their tight cash flow.
- So, what did they choose to do, (and what was the compromise)? Tune in to find out which scenario James and Amanda went for, were they successful and what was the compromise?
- How will James and Amanda reach their retirement income goal? James and Amanda had a retirement income goal of $60,000 p/a through property rents. With their preferred scenario chosen, Dave explains the next steps and viable options available to James and Amanda to achieve their retirement income goal.
- How to give your kids a leg up. Like many parents, James and Amanda were keen to help their children purchase property when the time is right. The trio discuss the methods they could use and for further insights, take a listen to episode #95 “Security guarantees, co-borrowing, gifts and more – Helping your kids buy their first property
- Ep#5 – The lifestyle vs Investment conundrum
- Ep#22 – Why the family home is often the biggest piece of the investment puzzle
- Ep#81 – Holiday houses – delirium or dream?
- Ep#95 – Security guarantees, co-borrowing, gifts and more – Helping your kids buy their first property
- Ep#106 – Australia China relations – what is the risk to the Australian housing market?
- Ep#116 – How to increase your borrowing power – Learn how investors, first home buyers and upgraders increase capacity
- Ep#143 – Property Planning Case Study #1 – What’s our next move? Renovate our home and invest, sell the home and upgrade or upgrade and convert the home into an investment
- Understanding your lifestyle goals and strategy
- Beware of an investment sprinkled with a little lifestyle
- How will your mortgages serve you in the long run?
- Five mortgage strategies that can grow your wealth
- How our mortgage strategy helps us to hold properties
- How to succeed with Property and Create your Ideal Lifestyle
- Mortgage Strategy 101 – YouTube video series.
Introducing James and Amanda
- Should we purchase a straight out investment property OR if can we an investment property that could double as part Airbnb, part holiday house and potentially become a fulltime holiday house or even a downsizing home, and by the way, without compromising on our lifestyle and achieving our long terms rental income goals for retirement?
- There is always a trade off between your investment goals and current lifestyle, it’s about reaching the right balance between the two.
- They love the beachside lifestyle, knew the areas they were keen on, but had been chasing the market for around two years, which had probably already cost them $200,000 to $300,000 in opportunity cost and were just not sure which way they should turn with their next purchase and their mortgage strategy.
- James Income is:
- $249,500 Base Salary
- $49,900 Bonus if achieved
- Living expenses – $144,000 p/a ($12k p/m) with almost half in:
- Private school fees – $64,000 p/a
- Reducing to – $32,016 in 1.5 year (daughter #1 finishes high school).
- Reducing to – $0 in 3.5 years (daughter #2 finishes high school).
- Post kids finishing school:
- James – Maintain employment and increase salary with a goal of more balanced lifestyle, following broadly with daughters completion of high school (end of 2025)
- Amanda at home mum, until daughters’ complete high school (end of 2025). At this point could transition to Part time work, and/or possible management of their personal investment properties – so in 3-4 years costs will reduce a lot and income could increase.
- More important if the holiday house retreat is to become an air bnb which can require more time and upkeep, but also extract more income during peak times of the year.
- Very little Surplus cash flow p/m – $400.
- Property value – $1,900,000.
- Debt – $239,000 with monthly P&I repayments of $2,465 p/m, but 100% offset
- Total Available funds – $460,000 as they had received a significant inheritance in recent years.
- $5,000 in shares and $422,000 in super.
- $25,000 limit in credit cards which are paid out monthly.
- They were reasonably risk averse, and both rated themselves ‘2 Conservative’
- Their comments were: ‘We think we need to be less conservative in future property decisions, but with more trust / confidence in our decisions, which we are striving to deliver for them via the Property Plan process.
- Increase family lifestyle immediately (location in regional area, time away together, could be a project), with a long-term plan to make money. They wanted to purchase a holiday house to enjoy with their kids and have as a retreat while their kids were still in school, while they could all still spend time together before the kids grow up and go out into the world to live their own lives.
- Their current home will remain as the principal place of residence for the foreseeable future, especially as their daughters are completing their schooling and possibly if they go to university in the current city they live in.
- When the time is right, happy for the holiday home/investment air bnb to become their home and the existing home could become an investment or sell it.
- And they would like to work towards a position where they could assist their daughters to get into property when they are ready to purchase down the track.
- They had bought and sold in another major capital city, and were aware of the cost of not holding that property, and had solid capital growth from their current home so were quite focused on aiming to accumulate and hold rather than sell as they had previously.
- The next purchase could be somewhat run down and therefore this could help with getting into their preferred market. They could renovate over time, or James romanticised over the idea of doing a knock down and build one day.
- They were open to selling or renting out the current home as part of their strategy to transition to retirement in 15 or 20 years.
- They also wanted to gain confidence in future investment and property decisions through the education and experience from working with our team.
- Goal for the next purchase, they would like:
- Purchase – investent / occasional holiday home / future long-term home
- Year – 2021
- Purchase price in today’s $ – $1,200,000
- Yield – 4.5%
- Location – coastal
- However the clients acknowledged that they couldn’t purchase the quality holiday house they were after at this price point and they would actually need around $1.4M to $1.6M
Financial and Money Goals
- They wanted their next purchase to align with their long-term financial goals, while maintaining the lifestyle they are accustomed to, as they didn’t want to cut back their spending, despite when they came to us, their surplus cash flow being low.
- So, the conundrum to unravel was how to complete the next purchase without compromising their current lifestyle. They want to be able to have the cash flow to have family adventures and future ’empty nest’ travels, as one of them is from overseas and they have close family there.
- They would like to retain at least $150,000 of their savings/available funds, and in reality, they wanted to retain as much as possible.
- Understanding the stretch required to secure their future lifestyle property in a desirable location, James and Amanda are willing to be stretched on a cash flow perspective to achieve their Lifestyle goals in the near term mindful that cash flow will free up in the future.
Scenario One was an investment at $1.2million which was the target price point initially, is fully financed, no cash contribution, surplus funds would offset this loan and maintain the debt on the home 100% offset should it become an investment in the future and change the repayment to interest only to save $2,465 pm cash flow.
Scenario two – was at $1.4million mark as we were able to find a solution whereby they could borrow the full purchase price plus costs and still achieve their cash flow goals and this would also allow them to hit their property and lifestyle goals. But they would pay off the existing home loan to reach borrowing capacity requirements and free up $2,465 per month cash flow, so not preserving the $239,000 debt on the home for future deductions. Available Funds of $205,200 post purchase is far inferior to the first scenario and their goal was to retain as much in Available Funds as possible, given cash flow is tight.
We also covered the extra cost involved with doing a knockdown and re-build and the risk for reduced capital growth and this was taken off the table.
From discussions with James and Amanda, it seems pretty clear that they would want to prioritise lifestyle, with an eye to wealth creation, rather than the other way around.
Moved ahead with Scenario 1 and with our support and guidance they purchased an investment property that was 1.2km and 5 streets from the shore on 1,114 sq metres with a beautiful beachy feel. Something that would readily rent out on air bnb or for a full-time tenant, and a location they would love holidaying in, and could see themselves downsizing into in a beach side suburb they were keen on for $1,405,000. All done within 3 weeks of having the Property Plan meeting after receiving the Property Plan.
Just shy of the full purchase price plus costs financed, which means that the available funds buffer remainder up close to $400,000 as our Strategic Mortgage Broker was able to influence a lender to disregard the private school fees with a supporting letter that they would end soon due to the daughters ages from the borrowers and given the total LVR under 50%.
They also paid out the existing home loan so no repayments on it any more freeing up $2,465 per month so cash flow was stronger after the purchase then beforehand.
By taking this pathway, they could in time do any of the following to achieve their long term goals:
- Sea change and turn the current home into an investment and purchase one low priced investment in a regional location and continue to focus on offsetting or paying off the debt on the new purchase.
- Sell the current home, pay off the debt on new purchase when downsizing, this would be CGT free, and use all the surplus cash to fund investments to achieve their income goals.
- Use equity in their existing properties to assist their daughters to get in to their first properties.
David Johnston – The Property Planner’s Golden nugget: Great example of all the moving pieces between our financial situation and personal drivers, and the outcome is very different and unique to each individual or couple. That’s something I want to highlight as we go forward.
Cate Bakos – The Property Buyer’s Golden nugget: if you’re looking for a coastal or in land place to call home in future years. You have to get it right. You could find yourself sitting on a property that is not an ideal investment. If it’s not an area long-term that you’re happy living in, then you’re looking at agent selling costs and stamp duty fees. Make sure you try before you buy, rent there, stay there for your holidays, get a feel of what it’s like to be a local.
- Thank you for the review! Cate shares a lovely review that we received in the apple podcast app. Not everyone is able to access expert advice, which is why we love putting these episodes together for our listeners. But more so, we really feel a spring in our step when we know we’ve helped a listener, so please keep them coming. They mean a lot to all three of us.
- Clean energy to bolster national defence. An interesting article in the Australian Financial Review has shed light on Australia’s reserves, with only 18 days of petrol supplies and 22 days of diesel supplies in stock. Part of the reason why the Ukrainian’s have been so successful in resisting Russian attacks, is the need for Russians to retreat to re-stock. The low reserves for Australia highlights a weakness in defence and puts the nation at risk is different ways. The good news is that this could be the push and driving force needed for Australia to become self-sufficient and transition towards green energy. We’re hoping!
- A round of applause for Adelaideis due. Recent reports from CoreLogic show that Brisbane and Adelaide continue to shine as Australia’s best performing capital cities. It’s not often that Pete gets to brag about Adelaide, so we’ll let him have this one.