Home' API Magazine : December 2014 Contents DECEMBER 2014 n APIMAGAZINE.COM.AU n 31
Association of Australia
You have created a great foundation
for your future, Rose. Let’s look at your
property investment options.
ffMove to Rushcutters Bay and pay
a lot of tax on the rental income
ffStay in the Cammeray property and
reconsider what to do next.
This is a great temporary solution
while you gather your experts around
you to investigate your choices. It’s vital
you make your decisions from the big
picture goals, the ones that support your
ffBorrow against Cammeray and ‘fix
the problem’ by buying a negatively
geared property that has great capital
The concept is that the rental income
from Cammeray would be able to
‘offset’ the negative rental income
from a new property and reduce your
In my experience trying to fix a
problem takes your eyes off the main
agenda, which is to create wealth for
your future. It’s usually much better
to refocus on what you want to achieve
and make decisions to support this
outcome rather than trying to patch
up a situation.
ffRe-evaluate and work out what’s best
in the long-term.
In my experience the most prudent
considerations now are:
ffWhere do you want to be in 10 to 15
ffWhat passive income would you like
ffWhat are you willing to do to achieve
Let’s make some assumptions so I can
demonstrate the principles of what’s vital
for you to consider.
ffYou’d like to create a passive income
of about $2000 per week.
ffThe rental income from your
property portfolio is five per cent.
This means you would need to own
an unencumbered property portfolio
valued at $2 million to create your
ffCapital growth of seven per cent per
annum, which is convenient for the
purposes of this article, however in
reality it can vary.
Now let’s work backwards.
Your goal is to own a property
portfolio valued at $2 million that’s
unencumbered and has a rental return
of five per cent, giving $2000 per week
Holding properties with neutral to
positive cash flow plus depreciation
benefits supports lower risk investing.
The key considerations to support a
sustainable holding phase are likely to
include the following items:
ffHaving contingency funding to
support any unexpected expenses.
ffInsurances to support any major
unexpected expenses such as illness.
ffProperties that support continuous
ffContinued employment to create
savings, and access equity to maintain
the value of your properties and their
ffOptimisation of the portfolio so it
can withstand any interest rates rises.
This shouldn’t include any properties
in towns under 100,000 people, as the
economy is generally too reliant on
ffAny tailored considerations.
If you have access now to about
$350,000 in funds to create a property
portfolio, (based on an assessment of
your Cammeray property being worth
closer to $540,000 and paying out the
cross-collateralisation through a sale or
refinancing), what could you do with
this to create your future income?
This can be leveraged at an 80 per cent
loan-to-value to give you $1.4 million to
invest. You could buy three properties
valued at $400,000 or four at $300,000
and leave some contingency funds for
your peace of mind.
Let’s apply our previous assumptions.
ffThis $1.2 million property portfolio
doubles over the next 10 years to a
value of $2.4 million and again over
10 years to $4.8 million.
ffThe rental yield remains at five
ffYou sell half of the properties to pay
down the debt.
ffYou have created a passive income of
just over $2000 per week on the
$2.4 million unencumbered portfolio.
Now I hope you can see why I’m so
upbeat for your considerations. This
portfolio and your timing in the market
can be optimised and adjusted for your
circumstances, providing many choices.
However, before you move forward,
you need to sort out Cammeray. Can
you unravel the cross-collateralised
mortgage or is it better to sell it because
its taxation considerations aren’t as
workable as other options?
You have been a great saver and the
above modelling only assumes you
focus on paying down the mortgage
at Rushcutters Bay. This is very
conservative. This equity can be released
in the future to support more investment
if that’s part of your considered property
investment plan, created with your
property investment adviser.
This fork in the road is a huge upset to
your ideas and yet in the bigger picture
it offers you the opportunity to create a
more robust and sustainable property
investment portfolio. It can give you
even more confidence. Well done! API
Rose’s real name has been withheld for
privacy reasons by request.
This information is of a general nature only and does not
constitute professional advice. You must seek professional
advice in relation to your particular circumstances before
acting. This information is also to be read subject to the
disclaimer on page 6.
f Keep the Cammeray property. Don’t sell.
f Avoid cross-collateralisation.
f Buy another three properties in Victoria
and Queensland to diversify.
f Use the $350,000 equity to your
advantage by borrowing again.
f Consider locking in some interest rates
f Rent a property in Rushcutters Bay,
and rent out the investment property
in Rushcutters Bay, for maximum tax
benefits, while still enjoying the lifestyle.
f Consider a smaller townhouse in an area
where returns would be neutrally geared.
f Keep the Cammeray property.
f Aim to build a property portfolio worth
$2 million debt free, which would provide
a passive income of $2000 per week.
f Avoid towns with a population of less
than 100,000 people.
f Use the $350,000 to buy three
properties valued at $400,000 or four
properties valued at $300,000.
f Aim to buy properties that have a rental
yield of around five per cent plus.
f Before retirement, sell half of the
properties to pay down debt.
EXPERTS’ SUGGESTIONS IN A NUTSHELL
Rose Denning n FORK IN THE ROAD
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