Forum Replies Created
Hi s.r.prop,
I think Domain allow private sellers. There's also the following website:
http://www.thepropertydeveloper.com.au/
Cheers,
MichaelHi James,
I'm working on $2,000/m2 on my MUH development in Sydney's Northern Beaches. That's a lot more than you're factoring in, but I won't be using a project builder as its a complex build requiring an excavated basement carpark and lift etc. Remember, units are normally more expensive than free-standing houses as there's a lot of dead air in those big McMansions. Units optimise every m2 and end up costing more as a result. More bathrooms, kitchens etc in your footprint.
Cheers,
Michael.
Hi Boshie,
I also live in the Northern Beaches, and also on a Battleaxe block with views. Come to think of it, I'm also a property developer too given I'm currently at council with a MUH DA for a three-unit development in the heart of Mona Vale.
The first thing I'd do is check your zoning. Pittwater Council have an online faccility that allows you to do this under their mapping section. If its zoned MUH then you stand a chance. If not, then in all probability it won't fly.
The other thing I'd ask is the slope of the site? My PPOR battleaxe is 20 degree slope on a bush block which limits the subdividable land size. Its currently 1600m2 but that is not subdividable because of the slope. They need to be a minimum of 1,000m2 each for subdivision on that slope. If its MUH then this all changes. My Mona Vale development has a total site size of only 700m2 and I'm putting three strata titled units on it. Taking it to its highest use as a value add activity. The margin is around $1M odd.
Anyway, I like your thinking and good luck with it!
Cheers,
Michael.Nice posts!
Methinks Techno = Michael Whyte in 8 years time. Remarkable similarities…
Resiwealth, nice post too! I’m gonna come see you some day soon. Like your style too much not to.
Cheers,
MichaelHi all,
WizardfromOz, thanks for the positive feedback. I feel a bit battered here every now and again, but persist with my posts in the hope that it at least lends a little bit of insight for those that may be interested.
I like what See Change has said above. I agree that you need to move with the market, and a balanced approach of growth and income allows you to do this. If the market is bounding ahead than a leveraged position makes sense. If its flat or sliding, then neutral or positive is a smarter position.
One point I think TMA is missing is that when you retire from salaried employment, the intent is to live off your investment structure. This does not necessarily mean that you will be living off the surplus “income” in your structure above expenses. You may be neutral and living off surplus “growth” at a lower tax rate. Of course, given you have no salaried income then you need to be neutral or better. But even if you have a small income and a lot of growth, then you can still draw some of that growth to live and leave the surplus growth in the structure.
If the market dips across the board and you haven’t diversified across asset categories then your surplus growth might not be as high. In this instance you might consider changing your level of gearing to increase your surplus income so you don’t rely on your growth to fund your lifestyle. I think this is sort of where See Change was heading.
I believe that proper investing is diversified across a lot of asset categories and even across sub-markets within categories. It is also a dynamic process and not a one shoe fits all, set and forget undertaking. You need to keep your structure mobile.
Cheers,
Michael.Originally posted by SeeChange:I think there is a place for living off equity , but to use it as a plan for retirement ( unless you’re loaded with a very low LVR ) is too risky.
See Change,
I agree. That’s why on the other thread I suggested that “If you find this too risky” then just up your equity assumptions until you’re happy with it. My personal approach would be a hybrid part income and part equity to fund my retirement. That’s option 2 in my spreadsheet (which I don’t know how to attach). The other two options I modelled were “Pure income” and Pure growth” strategies. They only vary by the amount of leverage you employ. Pure income was no leverage, so 100% equity. Mixed income/growth was partial leverage, so 50% equity / 50% borrowings. And Pure growth was maximised leverage at 20% equity / 80% borrowings.
If you assume the same amount of equity in and the same amount of cash drawn in to your pocket, then the maximum leverage approach delivered the best result for growing your equity. But this assumed 5% rental yields, 7% capital gain and 7.5% loan interest.
Obviously, if you tinker with these assumptions then the outcome would change.
The trick is to have enough “income” in your structure such that you don’t have to live off equity growth every year. But you want enough gearing that you can live off the growth in the good years and so pay much less effective tax.
All just a game of numbers really…
Michael.
Borginvestor,
You miss the point that drawing down equity does not reduce your year ending net equity. The approach is based on drawing equity “in arrears” from the growth in your portfolio. You should never draw more than its growth or you would reduce your net position.
In fact you should never draw more than growth less CPI indexation so that your true “buying power” of your net equity is preserved over time.
Overall, living off equity is a relatively simple concept but it is outside the comfort zone of a lot of people. Most people would rather live off surplus “income” from the structure and not surplus “growth”.
Read that last bit again, its the key point (particularly that word “surplus” in both options)…
Cheers,
Michael.PS. If someone can tell me how to attach a file then I’ll link a little 20k spreadsheet here which nicely illustrates the impact of the different LOI vs LOE strategies.
Steve,
How about a danger of NOT using equity to fund retirement:
1. Paying way too much tax on your income. By living off equity you can get away with paying “tax” at the prevailing cost of capital.
But I recognise that its not for everyone, and that your asset strategy and structure can either be conducive to this or not. You need a “growth” asset structure and not an “income” asset structure for it to be viable and appropriate.
Cheers,
Michael.Maximus,
That’s “combined” income. [biggrin]
I’m a supply chain executive in a manufacturing company and I’m on $140K. My wife is a solicitor and she’s on $60K. She’s applying for jobs at the $100K mark as we speak, so maybe I’ll need $240K in passive income in retirement! [blink]
Or then again, maybe $100K would do just nicely thank you very much… [blush2]
Cheers,
Michael.Originally posted by maximus:Originally posted by Michael Whyte:
My view: “I’ll be retired when my passive income replaces my salaried income (currently $200K pa)
WOW $200K.
Michael, can you tell us what your current occupation is?
Or even a clue if I’m being too nosey [biggrin]
Hmmm….
Some very interesting posts. For me:
Age now 35
Age planning on retiring 45
Age financially free 40You could argue I’m financially free now, but my net asset worth is still a lazy little over $500K. I want net asset worth of around the $2M mark to “retire” on. But retirement for me is just actively managing my investment portfolio.
My view: “I’ll be retired when my passive income replaces my salaried income (currently $200K pa)such that I can continue with my current lifestyle and investment strategies without having to work for someone else.”
Cheers,
Michael.Yack,
I hear you loud and clear, but I’m a bit more on the Don and Liz kinda approach right now. Property is only one aspect of my structure and as a percentage I’m going to scale it back from where it would otherwise be in a strong growth cycle.
I am however about to buy another property but am picking my sub market carefully. I still like the looks of south east QLD due to affordability and growth potential. Sydney is way off the books for now.
But most of my leveraged cash is getting parked in a trading fund in the equities markets. I’ll keep an eye on property and buy up to my $2M odd mark over the next 2-3 years. I’ll probably hold just one or two properties now at total value around $500K and buy up slowly another 2-3 properties at circa $500K each through the trough. I like the above median priced properties for the growth upside they offer. Cash flow and holding costs aren’t an issue for me.
Cheers,
Michael.Dr. X,
Amen to that!
I thought I was an exception to the rule in that I detest commercial television. I do love home theatre though as a bit of escapism, so I’m with Turboz on that one. They can be a bit violent of course, but as yet I don’t have any kids and I’m grown up enough to see them as pure entertainment.
And to think that some people actually pay for television!!! Quite a few of my neighbours actually pay for Fox or some other provider. To me this is totally insane…
About all I watch on the box is the odd spot of science fiction and the ABC news. And I tape the Sci Fi so i can fast forward the ads.
You’re not alone,
Michael.Old Skool Skata,
Originally posted by Michael Whyte:Rental income on IPs covers the other expenses not listed belowMy example is really rough, but the thing to remember is that the total structure is “neutral” which means cash expenses is covered by cash income. You just live off the equity growth…
Its a rudimentary example, but if the assumptions are “bullish” just scale up your equity and down your leverage until they’re not so bullish. Just means you have to wait longer until you have sufficient “net equity” to retire on.
Cheers,
Michael.Adrolia,
This is by no means financial advice. But for that price you could pick up a nice new townhouse in or around Mount Gravatt that would rent for around the $250 a week mark. Wouldn’t be CF +ve, but would be a nice yield and a good potential growth area.
You get good deductions on its being new too.
I’m looking at doing just that myself in the next few months or so…
Cheers,
Michael.Rob and others,
The main point being overlooked in the discussion to date is the point that the structure is neutrally geared. So, you don’t need to cover the borrowing costs (7%) with your capital growth (5%) to be able to stay ahead. You’re neutral on holding so all of your growth is gain.
I’ll try and illustrate this with a simple example. This is by no means exhaustive in its components but is meant to illustrate the concept with a simple model.
Structure:
You hold $2M in property with $400K in and $1.6M in borrowings (80% leveraged).
You hold $2M in shares with $1M in and $1M in borrowings (50% leveraged).Income:
$100K (5% dividend yield on shares)
$100K (5% capital growth on share). The shares are liquid so you can use the growth as an income.
Rental income on IPs covers the other expenses not listed below.Expenses:
$112K (7% interest on $1.6M property loan)
$70K (7% interest on $1M shares loan)Net Income:
$18K ($200K – $182K)
So, your income assets fund the holding costs of your growth assets.Growth:
$100K (5% capital growth on $2M property assets employed)So, if I “spend my growth†I can now draw down the $100K in growth on my property via an LOC. This costs me 7% or $7K for the year. This is still covered by my net income from my income assets. At the end of the year my growth assets have gone up by another $100K at 5% and I can pull it out again and spend it again. And once more this is at a “tax†rate of only 7% which is my LOC interest.
My tax on this structure is pretty much zero since my income is offset by my expenses, all the gain is growth which I spend and am taxed at only 7%.
This is by no means an exhaustive example, but I just wanted to help paint the picture on how it might all hold together. I’m effectively earning a gross passive income of $100K per annum taxed at only 7% and I’m doing this on a net asset worth of only $1.4M.
I’m not a guru, and I put this forward in the spirit of shared knowledge and mutual education. I apologise for not posting a reply earlier, but I’ve been busy at my real salaried job for the last little while. Please don’t consider my absence as any indication of unwillingness to post a reply to your questions.
Regards,
Michael.
Bradles,
Sounds like you’ve got a good plan to me. I’m a Peter Spann / Jan Somers / Steve Navra kinda investor too and so your particular strategy sits well with me. I do take the point though, that you shouldn’t overcommit yourself. Leverage is great for maximising your growth, but it needs to be done within your comfortable servicing levels and also allowing for potential risks. e.g. allow for interest rate rises, rental vacancies etc and factor this in to your servicability equation when figuring how much you can “comfortably” borrow. Then also keep a cash reserve to buffer against the unknown. It will significantly help with your SANF. [biggrin]
Your on to a winner IMHO, and at a great age to start.
Cheers,
MichaelTerry,
No problem. Below is “my take” on some of the key messages Steve delivered. This is by no means his complete teachings, and in all honesty is probably a misrepresentation of his material. It is just my personal key messages from the day:
Steve Navra Course Summary
The core message from Steve’s course is one of “making your money work for you 6 waysâ€. That’s why its called “Optimising your Investment Structureâ€. The structure is, unsurprisingly, composed of three asset classes: property, shares and cash. Steve argues that 1 dollar invested in your PPOR can in fact work for you 6 ways as follows:
PPOR:
1. Offset rent (5%)
2. Capital growth (5%)He then says you can re-use this dollar by taking an LOC against your equity to leverage at 10% down in to Investment Properties.
IPs:
3. Rental income (5%)
4. Capital growth (5%)You can further re-use this dollar by taking an LOC against your equity in your IPs to leverage at 50% down in to shares.
Shares:
5. Dividend yield (5%)
6. Capital growth (5%)So, structured properly your one dollar in your IP can earn you 30% returns pa. Of course, this is a very simplistic representation, but the fundamental message here is maximum leverage.
The biggest issue people face when trying to maximise leverage is cash flow, so Steve spends quite a bit of time describing approaches to provide cash flow out of the structure. His particular share fund uses Dollar Cost Trading (DCT) instead of Dollar Cost Averaging (DCA) to maximise returns. It is an income oriented fund which pays high franked dividends for cash flow and re-invests the capital gain for growth. He also talks about securing a cash bond with your equity LOC. This then serves as income and increases your borrowing power (leverage) even further. So long as the leveraged borrowing performance exceeds your costs for this income stream then you’re well ahead.
e.g. I use an LOC to buy a $100K cash bond. This cash bond shows as income in my next loan application so I am now able to borrow up to $1M whereas before I had insufficient serviceability but was equity rich. I invest the $1M in IPs making me 10% pa, and due to leverage that $100K return far exceeds my $7K interest charges on my cash bond. He advocates avoiding this if possible if your normal income streams are sufficient to satisfy servicing requirements at your maximum leverage.
Finally, he describes the compounding effect of having all your money work for you as hard as it can. With this structure in place it is possible to have phenomenal returns over a relatively short time period.
He also spends time talking about risk mitigation. His trading fund significantly limits the actual stock he trades in. He only trades the ASX100, and further limits these stocks down to his Top 25 based on a series of tests. He then actively trades these stocks buying when they fall and selling when they rise. He has a mathematical model which does the trading for him, he and his team spend most of their time selecting the low risk stock that they want to trade.
For IP risk mitigation he introduces his concept of “Rental Realityâ€. This basically advocates taking the mean rental yield over the last 5 years. Then use this as the basis for determining maximum purchase prices in your selected postcode. Start by taking the achievable rent then divide by the rental yield % to get the maximum buy price.
e.g. Yields over the last 5 years in postcode 2067 might have been 4.0, 3.5, 3.0, 2.8, 2.5. This gives a mean yield over the period of 3.16% pa. So, if you are interested in a property and know that it will deliver rent of $550 pw ($28,600pa), then the maximum you should be willing to pay for this property is $28,600 / 3.16% = $905,000. With yields currently at 2.5% they’re probably asking $28,600 / 2.5% = $1,330,000. So, buying within rental reality ensures you buy below fair value over the long term.
This is only a brief introduction to what Steve discusses but might help give some insight in to the broad areas of his expertise. I should say that I in no way work for Navra Financial Services and can not guarantee that this is an accurate representation of Steve’s information. It is just my personal take on his material based on a very brief exposure to it.
Regards,
Michael.SeeChange,
Agree completely, just did his course last Saturday and the best $150 I ever spent. Looking forward to the full blown plan now…
But I think you know this. [biggrin]
Cheers,
Michael.All,
Apologies for the double post but I didn’t know this topic had moved threads out of the development thread. For me living off equity is certainly the main game and is absolutely what I aspire to do. Let me work a sample scenario through using some simple numbers:
Year1 opening: Net asset worth $2M, total assets employed $4M (50% borrowings neutral gearing)
LOC: $100K to live on plus costs of $7K interest = $107K reduction in net worth.
Year1 conservative asset growth at 5% = $200K CG(0.05 x $4M) increase in net worth.
Year1 closing: Net asset worth $2.093MYear2 opening: Net asset worth $2.093M etc.
In this example, your asset base (which is neutral) has accumulated growth of $200K of which you spent $107K for the year. You’re still ahead by $93K net! This is about a 5% return on capital employed and exceeds inflation.
So, in summary, your closing net asset worth has increased greater than the inflation rate so you are AHEAD. At the same time, you’ve lived off your equity on a comfortable NET income of $100K for the year. You pay no tax as your structure is neutral, and the “cost” of your $100K income is only the 7% interest charge from the financial institution.
Remember, I’ve already said that you spend that growth in ARREARS so there is little risk of you over spending in a bad growth year. Of course, the portfolio is spread across asset classes to mitigate exposure to any one class and reduce downside risk.
Hope this helps spell it out.
Cheers,
Michael.PS At the same time as outstripping inflation with growth, your rents are going up so your gearing is improving. So you’re actually going even further ahead and will soon be better than neutral too.
PPS Just read Dazzling’s post at the beginning of this thread and noted the similarities. [biggrin] The main point I’ve added is the neutral gearing to get around Rob’s point suggesting living off rent instead. You’ve got “quality growth” assets neutrally geared to maximise your CG opportunity via leverage. There is no “income” per se from this structure except growth.
Rob,
I think you missed the point on how this would actually pan out. Terry is correct in assuming a neutral position on the portfolio, so living of your portfolio income is not an option. Let me work one through using some simple numbers:
Year1 opening: Net asset worth $2M, total assets employed $4M (50% borrowings neutral gearing)
LOC: $100K to live on plus costs of $7K interest = $107K reduction in net worth.
Year1 conservative asset growth at 5% = $200K CG(0.05 x $4M) increase in net worth.
Year1 closing: Net asset worth $2.093MYear2 opening: Net asset worth $2.093M etc.
In this example, your asset base (which is neutral) has accumulated growth of $200K of which you spent $107K for the year. You’re still ahead by $93K net! This is about a 5% return on capital employed and exceeds inflation.
So, in summary, your closing net asset worth has increased greater than the inflation rate so you are AHEAD. At the same time, you’ve lived off your equity on a comfortable NET income of $100K for the year. You pay no tax as your structure is neutral, and the “cost” of your $100K income is only the 7% interest charge from the financial institution.
Remember, I’ve already said that you spend that growth in ARREARS so there is little risk of you over spending in a bad growth year. Of course, the portfolio is spread across asset classes to mitigate exposure to any one class and reduce downside risk.
Hope this helps spell it out.
Cheers,
Michael.PS At the same time as outstripping inflation with growth, your rents are going up so your gearing is improving. So you’re actually going even further ahead and will soon be better than neutral too.
