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