Property Planning Case Study #7 – Can we keep our two existing properties, purchase our long-term home, start a family, and still retire on $150K p/a passive income? (Ep.178)

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In this week’s episode, Dave, Cate and Pete take you through:

The conundrum– Can we purchase the long-term home without selling any of our properties and retire in 20 years relying on passive income?

This case study follows the journey of Andrew and Bec, podcast listeners in their early to mid-thirties who submitted their scenario to the team to unpack via the Property Planning platform. They started their property journey early and each own a property, one of which they currently live in. On the horizon, they would like to purchase their long-term home, start a family, and retire comfortably in 20 years. Would they be able to do all of that without selling a property?

Their portfolio and goals

The trio discuss Andrew and Bec’s goals and their current property portfolio, one of which is undergoing a construction. They have worked hard to get themselves in a great spot, and after the construction is complete, their portfolio will be worth $2M and they currently have $300,000 in savings. Not bad for a couple in their 30’s. Ideally, they would like to be earning $150,000 in passive income from their investment properties ($75,000 in today’s dollars). The key questions to unravel were: when do Andrew and Bec purchase their future home? Do they need to sell any properties to do so? When can they reach their passive income target of $150,000. Can they retire in 20 years time? Can they do all of this AND start a family as well?

Modelling the scenarios

Five scenarios were modelled for Andrew and Bec, showing the sequential progression and timeline of decisions to be made and actions to take in order to reach their goals. The trio sink their teeth into the financial outcomes. Spoiler alert! Their passive income goal is reached but 1 year late. Given the laundry list of goals, we think this is a great outcome. Tune in to find out the three key steps that Andrew and Bec need to take to get there, plus how having children will impact their financial goals.

So you’re thinking of starting a family, who is going to scale back work?

There’s no doubt that having children is an important life goal for many Australians. But let’s be real, along with that bundle of joy come cash flow implications as kids are expensive and one partner normally scales back work for a period of time. In this particular scenario, Bec would like to scale back work permanently to 2 days a week in the first 6 years and 3 days a week thereafter. But that’s not the case for all families. The trio discuss how different scenarios can be modelled to make key decisions around employment when starting a family: which partner will scale back work, by how much and for how long?

Resources

Show notes

Setting the scene

In this case study we introduce Andrew & Bec. They were interested in completing a Property Plan as they want to plan for their retirement income.

Andrew is 32 and Bec is 36, with no children at the moment, however, they are looking at starting a family in the next 5 years. They currently live in Bec’s property and are happy to remain living here for 5 – 10 years, then upgrade to their long-term home, which they are confident will cost $800,000 in today’s dollars based on their requirements and their research. This will likely be a property with some land on the outskirts of Wilberforce.

Andrew also has a property that is currently being rented and he is in the process of securing finance to complete construction on the block. In addition, Andrew built a granny flat less than 12 months ago which produces $350 per week in rental income. Once the main property has been completed, Andrew believes they should get around $650 per week with only a $370k construction loan for the build.

Their goal is to build a net passive income stream from property of $75,000 p.a. in todays dollars or $150,000 p.a in 2042 year to allow them to retire in 20 years and enjoy their lifestyle.

Ideally, they want to hold both their existing properties, while building their investment portfolio and securing the long-term home, but are unsure if this is possible, so they would like professional advice to help them with the right strategy and to map out their long-term Property Plan!

Income

Bec: $155,000
Andrew: $125,000
Rental Annual Income – $18,200 at present, soon to be $52,000 with construction completed

Property Name –

Home – Wilberforce (assumed future rent @ 3% of today’s value) = $36,750 pa
Construction Investment – $650pw x 52 = $33,800 pa
Granny Flat – $350pw x 52 = $18,200 pa

Total = $88,750

Cashflow & Savings

Living expenses – $60,000 p/a ($5k p/m)
Monthly savings: $9,000 to $10,000 p/mth
Total Savings: $300,000

Assets & Liabilities

Total property value = $2,240,000
Total debt = $817,000
Total LVR = 36.50%

Goals and reasons for seeking advice

Lifestyle Goals

Purchase the long-term home on the outskirts of Wilberforce within 10 years for $1,000,000.
Want to enhance their lifestyle and create flexibility for themselves where work becomes an option by building passive income through investment properties.

Property/Lifestyle goals and questions

Can we keep Bec’s property, our current home, when we purchase our long-term family home?

Financial and Money goals

Build passive income of $150,000 through property/$75,000 in todays dollars
Goal year for retirement – 2043 (Andrew will be 52, Bec 56, 2042 would be the last year working FT)

Modelling and outcomes

So, the questions for us to unravel were:

When do Andrew and Bec purchase their future home?
Do they need to sell any properties to do so?
When can they reach their passive income target of $150,000?
Can they retire in 20 years time?

Scenario 1 “Base” – No additional decisions

Retirement goal year – 2043

Retirement Age – Andrew 52, Bec 56

Passive Income Goal – $150,000

Current Gross Rental Income – $52,000

Passive income

In 2022: -$12,000
In 2042: $99,000
- This is with just the one investment property, Andrew’s Cambridge Park property.
- 2042 is 20 years away, when Andrew & Bec want to retire.
Passive Income goal of $150,000 achieved in 2050.
Total Savings/Offset at $5,012,000 in 2050

Scenario 2 “Interest Only” – Wilberforce Loan switched over the Interest only in 2022

Retirement goal year – 2043

Retirement Age – Andrew 52, Bec 56

Passive Income Goal – $150,000

Current Gross Rental Income – $52,000

Given the clients would like to keep their existing properties, we have switched their Wilberforce loan over on their current home to become Interest only to help build savings at a greater rate which in turn will reduce the amount they need to borrow for the long-term home, and also maximise the amount of deductible debt for if/when it becomes an investment.

Current home Loan set up – Wilberforce:

Wilberforce Home Loan = $517,000 balance

Rate @ 4.57%

P&I repayment $2,400 per month

Switching to I/O at 5% = repayment of $2,154 per month (not considering offset account)

Factoring $300,000 today in offset the actual I/O repayment would be – $905

Cash flow benefit – current repayment $2,400 per month – new I/O repayment $905 = $1,495 p/m – $17,940 p/a – which will compound over the journey as that additional money will be directed towards their offset and then reduce their Interest only repayment further, increasing savings, and so on the impact grows.

Savings balance – 2027

$956,000 with no changes to repayments.
$1,057,000 with the Interest only repayment switch in 2022. An extra $100,000.

These additional funds of $100,000 will continue to build and help Andrew & Bec to have a greater deposit for the future home purchase in 2027, which results in a lower loan.

Given their home will be in a P&I repayment, this makes an even greater difference to their cash flow, and a loan that is $100,000 less will save Andrew & Bec about $540 per month or $6,500 per annum in cash flow on the future home.

Passive income

In 2022: $1,000 because of switching to I/O now.
In 2042: $99,000
- This is with just the one investment property, Andrew’s Cambridge Park property.
- 2042 is 20 years away, when Andrew & Bec want to retire.
Passive Income goal of $150,000 achieved in 2050.
- Despite moving onto an interest only scenario, the passive income target is not achieved sooner, this is for a couple of reasons:
- There is only one property earning income at the moment of a small amount and it takes until 2050 for the passive income to build to $150k after holding costs.
- In both scenarios the loans are fully offset before 2050, so it remains a matter of the passive income building to $150k net, which takes time.
Total Savings/Offset at $5,393,000 in 2050 (compared with $5,012,000 in scenario 1)

Scenario 3 “PPR-27” – on the previous scenario, we model the purchase of the PPR in 2027 for $1,020,000.

Retirement goal year – 2043

Retirement Age – Andrew 52, Bec 56

Passive Income Goal – $150,000

Current Gross Rental Income – $52,000

In addition to completing a loan switch for the Wilberforce property loan over to Interest only, we have completed the purchase of the PPR in 2027 for $1,020,000 ($800k in todays dollars).

Decisions:

2027: Purchase PPOR for $1,020,000 at 50% LVR on a P&I repayment.
- We estimate this loan would be at 60% LVR, or an extra $100,000 if the switch over to Interest only with the Wilberforce loan hadn’t happened. This benefit will compound over the years as the home loan is paid off far sooner.

Passive income

In 2022: $1,000
In 2042: $130,000
- As the new PPOR has been purchased, and Wilberforce converted to investment, the passive income achieved is higher.
- 2042 is 20 years away, when Andrew & Bec want to retire.
Passive Income goal of $150,000 achieved in 2044.
Only $20,000 dollars short.
Total Savings/Offset at $5,012,000 in 2050

Scenario 3a “PPR-27” – Still on scenario 3, but modelling the scaling back of Bec’s income by 60% while they have and raise children for 6 years. Living expenses also increased by $12,500 this year as the cost of living will increase with children.

Retirement goal year – 2043

Retirement Age – Andrew 52, Bec 56

Passive Income Goal – $150,000

Current Gross Rental Income – $52,000

In addition to completing a loan switch for the Wilberforce property loan over to Interest only, we have completed the purchase of the PPR in 2027 for $1,020,000 ($800k in todays dollars) and scaled back Bec’s income in 2024 as they start a family. In 2030, it is scaled back up by 50% (from the lower number), as Bec would return to working more days in the workforce.

We have also increased living expenses by $12,500 per annum in 2024 to reflect the higher cost of living with children. After 5 years, in 2029, this cost has been raised by an additional $6,000 per annum to reflect schooling costs.

Decisions:

Wlibaforce interest only
2024: Scaled back Bec’s income by 60% as they start a family.
2027: Purchase PPOR for $1,020,000 at 50% LVR on a P&I repayment.

Passive income

In 2022: $1,000
In 2042: $111,000
- 2042 is 20 years away, when Andrew & Bec want to retire.
Passive Income goal of $150,000 achieved in 2046.

Scenario 4 “2042” – as with Scenario 3a, but with an additional investment purchased in 2032 to bring forward passive income goal achievement.

Retirement goal year – 2043

Retirement Age – Andrew 52, Bec 56

Passive Income Goal – $150,000

Current Gross Rental Income – $52,000

In addition to completing a loan switch for the Wilberforce property loan over to Interest only, we have completed the purchase of the PPR in 2027 for $1,020,000 ($800k in todays dollars) and scaled back Bec’s income as they start a family. In 2030, it is scaled back up by 50% (from the lower number), as Bec would return to working more days in the workforce.

We also purchase another investment in order to bring forward the year the passive income goal of $150k is achieved.

Decisions:

2027: Purchase PPOR for $1,020,000 at 50% LVR on a P&I repayment.
- This is $800,000 in todays dollars.
2032: Purchase Investment for $950,000 at 105% LVR on an Interest only repayment.
- This is $600,000 in todays dollars.
- Growth of 4% and yield of 4%.

Passive income

In 2022: $1,000
In 2042: $131,000
- 2042 is 20 years away, when Andrew & Bec want to retire.
Passive Income goal of $150,000 achieved in 2043 – the year the clients want to begin retirement. So, it is not quite the 2042 goal, only missing by one year and meaning they would work for 20 years and two months!

Retirement

If Andrew and Bec did want to retire end of 2042/the year 2043, here’s how their financial picture would look:

Retirement Age

Andrew – 52 years old
Bec – 56 years old

Passive income

End of 2042: $131,000
End of 2043: $152,000
- This is the end of the first year of retirement, and in this year the $150k goal is achieved.

Savings / Available Funds

End of 2042: $1,251,000
End of 2044: $1,257,000 – this is the lowest their savings balance would drop to.
End of 2052: $2,235,000

This is without accessing any super, not any other investments that may pay dividend income, such as Shares or ETF’s.

Gold Nuggets

Cate Bakos – The Property Buyer’s Golden nugget: Understanding your property strategy and understanding what the end goal is a good starting point. They are not going hard for capital growth, their investment property was 4% yield and 4% growth. Theirs is a rental strategy, understand it early so the things you do in your 20’s and 30, so that it supports you through to retirement

David Johnston – The Property Planner’s Golden nugget: The power of being able to create a vision for your future. You can achieve what you can imagine and the ability to build it out in a platform or tools which allow you to look at the future and how it will flow out. Set out and create your own plan for yourself and it gives you an advantage to achieving your long-term goals

Market updates

Investor numbers take a dive

Dave shares data on new loan commitments from April to August which show that investors are the cohort most heavily impacted by the property downturn and are electing to dip out of the market. Lending to investors has decreased by 20% over this period of time, while lending to first home buyers and subsequent home buyers has declined by approximately 10% in comparison. This development puts pressure on rental markets, compounding lack of supply for prospective tenants. With the government throwing more money at buyers looking for homes, this decline in investor demand is likely to exacerbate the rental situation

Renovator’s delight in abundance

With builders fully booked, material shortages biting, supply chain issues and costs of renovating on the up, more buyers than ever before want to purchase a property that is polished and renovated. But this is very hard to find in today’s market, with many listings offering properties that require some (or a lot of) maintenance. Cate shares some insider intel on why these properties are going up for sale and it doesn’t bode well for investors.

Which countries have had the most growth in house prices over the last 40 years?

Check out the cool infographic from the OECD showing growth in housing values for OECD nations over the last 40 years. Housing growth is measured in real values, which means that inflation is factored in to the equation. Which country comes in on top with a 500% increase and where does Australia sit?

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