Show notes – Property Planning Case Study #5 – Announcing the Property Planning interactive software platform! Do I need a large portfolio to achieve my retirement rental income goal of $100k? (Ep.167)

 
 

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

Introducing Nick and Rachel!

In this case study we introduce Nick and Rachel who are a couple in their early thirties (both 33 years of age), with two children, living in a home they purchased in one of Australia’s capital cities.

They wanted some expert Property Planning advice because they –

  • Want to make great property decisions for themselves in the short term, whilst factoring in there long term.
  • In particular they have just sold a business and have an extra $1,500,000 in the bank.
  • They are keen to purchase an investment property right away.
  • They are happy with there existing home and location, they have a young family who are 4 and 2, but want to spend around $400,000 on renovations on it to get it to the level that it will cover all there needs for the long term.
  • They also expect to receive an inheritance in of around $1,000,000 in around another 10 years which they want to factor into the plan.
  • Finally, they both enjoy working, but they also want to create further flexibility for themselves so that they can scale back there employment to 4 and 3 days per week well before retirement.

Financial overview

  • Employment income – total $260k
    • Rachel Income is $155k full time
    • Nick income is $105k full time
  • Kids – 2 – four and two years old and plan to have one more so include in modelling in the platform one year of maternity leave for Rachel which is something providing them with uncertainty today.
  • Living expenses – $84,000 p/a ($7k p/m)
  • Surplus cash flow p/m – $3,600
  • Total Available funds – $1,010,000
    • Savings – $1,000,000 (all in offset)
    • Share portfolio – $10,000
  • Super – $340,000
  • Inherit $1,500,000 in 2035.
  • They were reasonably risk averse

Existing property 1 – PPR

  • Location – Cheltenham, VIC
  • Year Purchased – 2022
  • Purchase price – $1,485,000
  • Current value – $1,500,000
  • Debt – $1,188,000
  • Monthly repayment & type – $4,500 p/mth on P&I, only $200 interest per month. This is well above the minimum.
  • Offset – $1m
  • Equity – $312,000
  • Borrowable equity to 80% LVR – $12,000

Lifestyle Goals

  • Fortunate to have already purchased their family home and can very much see themselves here long-term.
  • They plan to complete a renovation on the home, ideally in the next few years, which they expect will cost up to $400,000.
  • Want to enhance their lifestyle and create flexibility for themselves where work becomes an option by building passive income.
  • Purchase an expensive new car now.

Property goals

  • Next Purchase – Want to buy their first investment property, which they plan to hold long-term OR renovate first. Not sure which to do first but were leaning towards investment.
  • Their preferred property pathway for the Next Purchase:

Financial and Money goals

  • Build passive income of $100,000 through property.
  • Goal age for retirement – 55 (22 years away as both 33)
  • Money goals for the Next Purchase:

Property Plan modelling and outcomes

So, the question for us to unravel are –

  • For the Next Purchase
  • * when do Nick and Rachel purchase their investment property,
  • * what should the strategy be EG price point, location
  • * when should they complete the renovations on their home?
  • Long term
  • * Can they achieve there retirement income goals,
  • * Can they scale back work earlier.

A. Scenarios modelled

After Nick and Rachel keyed in there information, and modelled out there first purchase of $800,000 and the renovation in a few years, the algorithm mapped out a pathway to achieving there goals. When our Property Planner held the first Plan meeting with them, and because and Partner/Adviser user of the platform can view the back end and make adjustments with the client or on there behalf, it was clear that they could purchase a better quality investment with their first purchase which was something they were keen to do.

They were of the view that they didn’t like the idea of owning lots of properties, (the previous Property Plan had them purchasing a lot of $400,000 to $600,000 value properties) and the Property Planning platform made it clear that they didn’t need to take this path if they didn’t want to.

Further, they preferred the idea of purchase a couple top class properties, and in different capital cities to where they live to provide them with diversification.

This meant we made a few slight adjustments to their initial ‘Base’ scenario that they created in the planning meeting including increasing the next purchase up towards the upper limits of what fitted in with there Money Goals for the next purchase with a purchase of $1,200,000.

The reality is that with their significant buffer of savings, this was a less risk choice then for most people.

Scenario 1 “Base” – Renovation on hold: Purchase an Investment at $1,200,000 – 80% LVR

Why

  • Maximise the quality of the property within their affordability range or Money Goals in a top tier capital city in the location of their choice.
  • Achieves their Surplus Cash Flow & Available Funds Money Goals.

How

  • Purchase Price – $1,200,000 – modelling 5% CG and 2.75% yield
  • Purchase costs – $60,000
  • Cash contribution – $300,000 – Contribute to the purchase in order to boost price point, as they only have $12,000 of borrowable equity that could be contributed to their purchase.
  • LVR – 80% LVR
  • Total lending – $960,000

Money Goals Outcome

  • Surplus Cash Flow Money Goal Achieved – $1,650 per month assuming an interest only repayment at 4%, this is greater than their goal of $1,500.
  • Available Funds Money Goal Achieved$600,010 which also factors in purchasing a new car and a holiday that year as the platform can model in random costs over the journey as well. This is greater than their Available Funds goal of $200,000.

Pathway

2028: Purchase an investment for $950,000 at 90% LVR because this is where the borrowing capacity capped out around, however they could use equity in the other property’s so there was no mortgage insurance.

Modelled – 4.5% capital growth and 3% yield

2032: Inheritance of $1,500,000

2033: Purchase an investment for $1,400,000 at 105% LVR.

Long-term outcomes are:

  • Passive income achieved in 2052 – $113,000
  • End passive income in 2052 – $113,000
  • End equity in 2052 – $12,000,300
  • Available Funds in 2052 – $5,915,000

Our thinking

Initially the clients started with an $800k investment purchase as their next decision when they came to us. From there we assessed their current position and goals, and they discovered they could bump up that price point and give themselves a chance to purchase a better-quality asset.

The above is the base scenario that the clients built out themselves with the second investment purchase in 2033 added in through discussions and adjusting the base algorithm calculation to meet there preference to make as few property decisions as possible to meet there goals.

We created the two scenarios below and these include property, financial and lifestyle decisions through to 2052.

With the above scenario, it’s the long-term outcomes that are pushed back. Passive income goal of $100k is not achieved until 2052.

Scenario 2

Complete investment purchase and reno, plus pay down home loan by $300,000 to increase BC for investment purchase – Purchase an Investment at $1,200,000 – 105% LVR but there overall cash position remains the same but they have more deductible debt and less non-deductible debt.

This also helps them achieve better retirement cash flow goals sooner because the home loan is paid off sooner, and therefore they can also scale back work sooner.

We also discussed and modelled how delaying purchasing an expensive car or spending less on the car and how that gave the ability to purchase the investment now, complete the renovations now and they could delay the car or spend less on the car.

Why

  • It allows for two more investment purchases, one for $950k in 2028, and then another after the final inheritance in 2033 of $1,400,000, so 3 investments in total.
  • Paying their home loan down by $300,000 will increase their borrowing capacity for the investment purchase. Means they will have more deductible debt and can borrow the full purchase price plus costs and less non-deductible debt whilst still achieving everything in scenario 1.
  • Brings forward the next investment purchase compared to Scenario One (not paying down the home loan at all other than standard repayments) and Scenario 3 (Paid $400k onto the home loan and depleted the Available Funds balance further).
  • This brings forward the future purchase by roughly 4 years in both scenarios and allows for additional time for the rental income on investment #2 to increase.
  • Achieves their Surplus Cash Flow & Available Funds Money Goals.

How

  • Purchase Price – $1,200,000
  • Purchase costs – $60,000
  • Cash contribution – $300,000 to their home loan
  • Cash contribution – $0 to the purchase
  • LVR – 105% overall LVR
    • 80% secured against new purchase
    • 25% secured against the home
  • Total lending – $1,260,000
    • $960k secured against new purchase
    • $300k secured against the home

Outcome

  • Surplus Cash Flow Money Goal Achieved – $1,790 per month assuming an interest only repayment at 4%, this is greater than their goal of $1,500.
  • Available Funds Money Goal Achieved – $710,000 far exceeds their Available Funds goal of $200,000 and leaves more than the $400,000 required for their renovations.

Pros

  • There are funds which would allow the renovations to be completed right away, enhancing their lifestyle now rather than in the future.

Pathway

2028: Purchase an investment for $950,000 at 90% LVR. Despite borrowing greater than 80% LVR for this purchase, there is no LMI payable, as the clients have enough borrowable equity in their existing properties to cover the additional 10% and avoid Lenders Mortgage Insurance.

In fact, on equity alone, the clients could have purchased at greater than $950k and/or borrowed above 90% LVR, it was their Money Goals that dictated the purchase price and borrowings.

2032: Inheritance of $1,500,000

Pay $600k of these funds onto the home loan, which will pay the loan out completely. Alternatively, could switch it over to interest only and the cash flow would still be $0 by having it all in the offset account. The power of the platform.

2033: Purchase an investment for $1,400,000 at 25% LVR.

Long-term outcomes are in today dollars:

  • Passive income goal achieved in 2045 – $106,800
  • End passive income in 2052 – $233,900
  • End equity in 2052 – $15,886,300
  • Available Funds in 2052 – $3,287,100

Scenario 3 “Reno 2” – complete investment purchase and reno, plus pay down home loan by $400,000 to increase BC for investment purchase – Purchase an Investment at $1,200,000 – 105% LVR

Why

  • This provides a more conservative approach where they pay down the loan more, and wait to purchase the second investment after the inheritance which Rachel wanted to see and you can see that the financial outcomes are not as strong as scenario 2.
  • Paying their home loan down by $400,000 will increase their borrowing capacity for the investment purchase. Means they will have greater deductible debt and less non-deductible debt than $300,000, but different to Scenario 2 it will mean one less purchase throughout their journey and a lower spend on the purchase in 2033 to achieve goals.
  • The long-term outcomes change as follows:
    • Overall passive income lower at $165k compared to $233k at the end of the simulation in 2052, however, in both scenarios retirement can occur in 2045 and this will produce a greater passive income in that year – $117k to $107k.
    • Lower overall equity is built when compared to scenario 2 as there is one less property purchase, however, a greater Available Funds balance is achieved in 2052 – $4,965,000 compared to $3,287,000.
  • Brings forward the future purchase compared to not paying down the home loan at all – this doesn’t necessarily bring the future investment purchase forward but it does bring forward their retirement goals as they don’t achieve the passive income goal of $100k until 2052 in scenario one, where they don’t pay their home loan down. This highlights how crucial and valuable mortgage strategy is.

How

  • Purchase Price – $1,200,000
  • Purchase costs – $60,000
  • Cash contribution – $400,000 to their home loan
  • Cash contribution – $0 to the purchase
  • LVR – 105% overall LVR
    • 80% secured against new purchase
    • 25% secured against the home
  • Total lending – $1,260,000
    • $960k secured against new purchase
    • $300k secured against the home

Outcome

  • Surplus Cash Flow Money Goal Achieved – $1,880 per month assuming an interest only repayment at 4%, this is greater than their goal of $1,500.
  • Available Funds Money Goal Achieved – $610,000 exceeds their Available Funds goal of $200,000, however, would mean they dip below their $200,000 goal should they complete their renovation in the next couple of years, given the $400,000 estimated cost, and other planned events such as holidays.

Pros

  • There are funds which would allow the renovations to be completed right away, enhancing their lifestyle now rather than in the future.
  • Paying down the extra $100,000 compared to scenario two does mean their home loan is lower which increases surplus cash flow and equity in the home. The numbers are superior by $90 per month in surplus cash flow but inferior by $100,000 in Available Funds given the home loan is paid down by an additional $100,000.

Cons

  • Available funds are lower, meaning the renovation would not be possible to be completed right away, which will have a negative impact on lifestyle.

Pathway

2032: Inheritance of $1,500,000

Pay $600k of these funds onto the home loan, which will pay the loan out completely. Alternatively, could switch it over to interest only and the cash flow would still be $0.

2033: Purchase an investment for $1,100,000 at 105% LVR.

Long-term outcomes are:

  • Passive income achieved in 2045 – $117,000
  • End passive income in 2052 – $165,200
  • End equity in 2052 – $12,053,000
  • Available Funds in 2052 – $4,965,000

Our Thinking

Nick & Rachel find themselves in a fortunate position where they can pay down their home loan and reduce their principal & interest repayment. By doing this, they also allow themselves to borrow the full purchase price plus costs of the investment purchase, which is key mortgage strategy.

Ensuring they had enough in funds to complete the renovation is important, and the clients had originally planned to purchase multiple vehicles, which would have stood in the way of renovating their home and enhancing their lifestyle, so they reached a great decision here to create their ideal family home through a renovation and will benefit for years to come.

The decision to purchase a 3rd investment property is the clients and we can see they would hit their long-term passive income goals with only the two investment properties, which is a great outcome.

The decision to purchase a 3rd investment or not does not need to be made now, so they have the ability to see how their financial position and their personal circumstances change over the years before this decision.

For the moment they have taken positive and significant steps to:

  • Reduce their home loan significantly and bring forward the expected date they pay if off altogether.
  • Purchase their first investment property, a capital growth focused property in Melbourne.

Complete a renovation on their family home and create a space they love.

B. What did they choose?

Scenario 2:

  • Paying down home loan by $300,000.
    • Client could have paid their home loan down by up to $400k, however, were more comfortable retaining the extra $100,000 in their Available funds balance and providing the opportunity to purchase an additional investment along the way if they choose.
  • Purchasing an investment at $1,200,000, borrowing at 105% LVR.
  • Completing the renovation shortly after completing the investment purchase.
  • In this scenario, it was possible to purchase a 3rd investment property which provides for far greater passive income outcomes by the end of the simulation in 2052, as they will reach an income of $233,000 from their property portfolio, compared to $165,000 in Scenario Three.
    • They do still easily achieve their passive income goal in Scenario Three and are able to retire in 2045, same year as Scenario Two, and actually have more passive income at the time – $117k to $107k – however, the client wanted to see if they could purchase another investment.

C. The outcome

  • This will allow them to secure a quality asset for their first investment and complete the renovation on their PPR.
  • This will allow them to achieve both their Surplus Cash Flow and Available Funds Money Goals, even after completing a $400,000 on their PPR.
  • They chose to use a Buyer’s Agent and they worked with one of our preferred partners whom we receive no kickbacks from.
  • Currently in the process of selecting a location to target for their purchase and expect to have purchase in the coming months.
  • This scenario/pathway also allowed their next investment purchase to come forward, a decision that was modelled out in Property Planning Australia’s purpose-built platform, the only one of its kind, which puts our clients in control of their property and financial future.
  • Nick and Rachel now have greater clarity regarding their future financial position and when they may be able to step away from full time work!

Overall, the clients made the decision to purchase their first investment property with full clarity over their financial future and the confidence to make these decisions despite Rachel’s conservative nature.

Purchasing a high-quality asset and getting this first investment property decision right, allows Nick and Rachel to lay solid foundations for their property journey, which will propel them to create their ideal lifestyle

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