In this week’s episode, Dave, Cate and Pete take you through:
1. Craig’s question
Hi Dave, Cate and Peter,
Thank you so much for your podcast Property Planner, Buyer and Professor. I’ve listened to all your episodes and have found it to be a wealth of knowledge, helping me sculpt and manage my family’s property portfolio throughout the years.
I was very interested to hear you talk about the ‘end game’ for property portfolios and how these can differ in different circumstances. This is not a common topic for podcasts as they are usually about the finance and purchase phases of investing.
I am interested in your opinion on our portfolio and some possible scenarios.
Our goal is not firm but a wish at this stage is of reaching $100,000 in passive income per year to allow us to retire and be able to travel.
I am 45 and my wife is 49, we have 2 kids 15 and 13. We live in our home in Sydney which is mortgage free worth $1.8 to $2 mil and $40k would allow for a minor renovation to see us through.
Our Portfolio consists of:
- 2br townhouse in Miranda 2228 NSW worth about $900k with $250k mortgage earning $510 P/W rent. (Which is under market but self managed with great tenants.) Townhouse is low maintenance with strata fees of $4,000 P/Year. Interest rate 1.89% fixed P&I for another 14 months.
- 3br house in Plympton Park 5038 SA worth between $750-$800k with $435k mortgage earning $400 P/W rent. (House could use $30-40k renovation to achieve better rent and ensure low maintenance costs for the future.) Interest rate 1.89% fixed P&I for another 14 months.
- 3br house in Reservoir 3073 VIC worth between $900-$1mil with $660k mortgage earning $540 P/W rent. (House is in great condition, not requiring maintenance for many years.) Interest rate 2.23% fixed P&I for another 20 months.
We have a $22k variable loan which is 100% offset for emergency.
We also have $300k in Australian and US shares which yield $10k P/Year in dividends.
I have $760k in Super and my wife has $170k.
I earn $200k P/Year and my wife $17k working part time.
This is the first year we have a tax bill due to the properties running positive after depreciation and tax deductions which is taking a bit to get used to. I am expecting my tax bill next year to be higher again due to our low interest rates.
Ideally I would like to retire in 8 years (53 yo) and still do some part time work if required to top up and allow us to travel.
My wife will look to retire in a few years.
I feel we will have plenty of money when we get to our preservation age (60) and be able to access Super, but can we be self sufficient until then?
Will we need to sell a property to allow us to retire before our preservation age? Or are there other ways to finance our lifestyle for 5-7 years without work?
I would appreciate being part of a case study and hear your professional opinions as to how things could play out in the future.
All about Craig and Jane
Firstly, well done on having your home almost fully paid off in NSW, and already have your portfolio positively geared across 3 properties. What a great achievement at your age.
And also for building some diversification into by owning 3 investment properties across three states. You would have very minimal land tax payable which ensures it is not eating further away into your cash flow.
And good solid level of superannuation and $300k of shares for further diversification.
Overall, it is a really well constructed portfolio and it almost the perfect example of how to construct a Property Plan without getting to complicated or needing too own too many properties.
No doubt grandparents paying x 2 kids private schooling has helped with this picture, but there is a lot to be said to bring forward any plans for inheritance so that the family and the givers can see the benefit it brings during there life time rather than waiting until after they have passed.
Overall, it is a great achievement so well done.
Firstly, given your goal age for retirement is so soon, and you do have some debt still in place, we have not simulated another purchase so that you can focus on debt reduction, and increasing your net passive income from your three properties towards your goal.
Scenario 1 “Base” – No additional decisions
Retirement goal year – 2031
Passive Income Goal – $100,000
Current passive income
- In 2022: -$32,432
- In 2030: -$6,641
- 2030 is 8 years away, when Craig wants to retire or scale back.
- Passive Income goal of $100,000 achieved in 2047.
Scenario 2 “Interest Only” – Loans switched over the Interest only in 2024
Retirement goal year – 2031
Passive Income Goal – $100,000
Once the fixed period expires on the three investment loans, which is 2024, complete a loan switch for all three over the Interest only.
Passive income
- In 2022: -$32,432
- In 2024: -$4,066 (after INV prop loans switch from P&I to I/O)
- In 2030: $26,723
- 2030 is 8 years away, when Craig wants to retire or scale back.
- Passive Income goal of $100,000 achieved in 2040.
Savings
- In 2030:
- Property values $6.63m
- Debt $1,324m
- In 2040: $1,515,000 (when the passive income goal is reached)
- Property values $11.275m
- Debt $1.324m
Scenario 3 “Retire” – Craig’s income reduced by 80% in 2031 and a property sold to subsidise their lifestyle until preservation age in 2037.
Retirement goal year – 2031
Passive Income Goal – $100,000
In addition to completing a loan switch for all three loans over to Interest only, we have also scaled down Craig’s income by 80% in 2031 and sold a property to help subsidise their lifestyle until Craig reaches preservation age in 2037.
Their property in Plympton Park, Adelaide to be sold in 2032, so it can be in a different tax year to the last year he earned his full income.
Selling Adelaide as it brings in the lowest net cash flow
Passive income
- In 2022: -$32,432
- In 2024: -$4,066 (after INV prop loans switch from P&I to I/O)
- In 2030: $26,723
- 2030 is 8 years away, when Craig wants to retire or scale back.
- In 2037: $49,918
- This is the last year before they can access Craig’s super.
Passive Income goal of $100,000 achieved in 2049
Savings
- In 2030: $466,348 – ages 53 and 57. Mick, do this each time pls you say a year.
- Property values $6.63m
- Debt $1.324m
- In 2032: $864,485 (when Plympton Park is sold)
- Property values $6.155m
- Debt $896k
- In 2037: $524,065 (the last year they need to support themselves before they can access Craig’s super)
- Property values $8.055m
- Debt $896k
- In 2045: -$40,450
- This is first year their overall savings go into the negatives.
- This is unlikely to eventuate as they would access their super from 2038 onwards when Craig reaches preservation age.
- Property values $12.40m
- Debt $896k
In 2037, Craig & Jane would have $524,000 in savings, so could they bring the retirement forward and run the savings down closer to $0, given they have strong super balances that will provide a strong pension.
The outcome
- Craig and Jane both retired or having significantly greater freedom to enjoy their lifestyle.
- Passive income goal of $100,000 purely from property achieved in 2049.
- Income streams from share portfolio and pension from super will boost their cash flow position significantly and help to keep their savings levels building, as opposed to falling below $0, which would be the reality should they have no pension to draw from super.
- Savings used to meet cash flow needs while the passive income from property is still growing.
