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In this week’s episode, Dave, Cate and Pete take you through:
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.
Financial overview
- 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.
Lifestyle Goals
- 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.
Property Goals
- 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.
The outcome
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.
