THE GAME PLAN
How we do it
Here, we unpack the full box and dice around building a portfolio, how we tailor the approach to your bespoke needs and what it looks like in a spreadsheet. Finally, we discuss the next steps and how we keep moving forward.
Everyone’s circumstances, requirements and goals are different, so it’s important that each strategy is tailor-made to those needs. More importantly, is the sleep at night factor. By that we mean, we can cut up an approach and strategy in many different ways, but ultimately, we need to ensure your best interest are kept at heart and you can sleep at night after signing off on the strategy.
It’s important to start your portfolio with high growth properties that will set a platform that enables you to grow and diversify where required. We are big advocates of purchasing houses as opposed to units and we look for houses where value can be added by way of cosmetic/structural renovations and/or subdividing. Of course, not all of those value-add scenarios meet everyone’s criteria, however, it’s an important POD on properties you own if they have potential to add value in the future; either for you or prospective buyers. This adds a significant weighting to the value, but also, most importantly allows you to manufacture equity when your funds permit throughout the ownership phase.
To be clear here, It doesn’t really matter how many properties you own. What is more important is the value of your asset base and the individual quality of those assets and how they are working for your individual needs.
Implementing the right financial structures is incredibly vital for any property portfolio and one key item is the emphasis on Interest only lending that enables you to maximise your cash flow position. Likewise is the emphasis of offset facilities to help reduce your monthly liability and reduce the interest you pay on your loan. An offset account is a transaction account linked to your home loan account. The account’s balance is ‘offset’ daily against your home loan balance, and as a result, you’re only charged interest on the difference between the two.
Ultimately, you want your portfolio to be unencumbered to deliver you a great passive income for retirement. However, immediately, you won't always be earning a wage, and a good one at that, so it's important to leverage now to grow the portfolio whilst the banks will lend to you.
We monitor your portfolio on a daily basis, so we are always going to be aware of how our property plan is tracking against the actual market. It allows us to pivot and adapt if required to ensure your end goal is always on track, even if we need to take a detour or realign along the way. So it's important to note, that what we have recommended here, may not be exactly how the plan plays out. We need a platform to work from to ensure we are aligned and then importantly, we will continually monitor your portfolio against the original plan.
The main priority is creating leverage in the market and expanding your portfolio through a combination of growth and high yielding properties.
This is when you begin consolidating your portfolio and your debt by adding value to your existing portfolio through smart and effective renovations (if included in your overall strategy plan), adjusting rents and capitalising on land sub-division opportunities. It's also where we recommend revisiting the loan products to ensure you have the best facility in place with the most competitive interest rate available to you. Specialist advice is required around the structures set to begin paying down the debt in your portfolio. Any tax deductions and a surplus of funds should be used to start paying down your total debt position.
A reminder, there will be a time where your cash flow needs to allow for your loans to convert to principal & interest.
This is when you create strategic results in your portfolio based on your goals, meaning, in your case, the ability to create an annual passive income.
To do this, at Milk Chocolate, we focus on the following steps to building the portfolio:
1. Clarify your position and goals
2. Evaluate the most appropriate tactics
3. Establish a plan for cash flow
4. Suburb and property specific due-diligence
5. Ongoing management
Finally, it is imperative that we protect you and your assets from the outset, so this involves personal income protection that covers you in case of injury or permanent disability and of course, building and landlord insurance for each property that is purchased.
To recap, you are looking to initially invest c. $100k into the next property with the key criteria to build a portfolio that delivers a passive income in retirement.
To achieve this, we are targeting the following scenario:
Accumulate a total of 6 properties (includes your existing property + your family home)
Purchase the family home in Sydney's Inner West in 2022
From 2022 - 2033, your monthly holding costs including the family home, is c. $8K/month
By 2033 (14 years), your total asset value will be c. $9.295M
From 2033, start receiving an estimated passive income from your portfolio of $63K pa ($5.2K/month) after selling down two properties and the proceeds of the sale to sit across your existing offset accounts
From 2033, we have modelled 90% of your debt across the family home, property 4, property 5 and property 6 to be offset.
By 2043, an assumed net total cash surplus position of $3.9M (equates to 20 years of living expenses @ $195K per year). This is achieved by selling down property 4, property 5 and property 6. At this point, we have modelled your plan to hold the family home and the debt is 100% offset.
Disclaimer: We strongly recommend washing our numbers and strategy with your financial planner and tax accountant to ensure the numbers work with your personal tax situation. Our models make assumptions on your tax positions for this purpose.
The recommendation for property 2, is a house in Brisbane. The area we are targeting is the northwest and northeast region, approximately 10km from the Brisbane CBD. We are working towards a max. purchase price of $575,000 with a 10% loan product. Brisbane has stalled in its growth stage of the cycle, and in fact, has pulled back leading into the election. What we like, however, is the fact the macro-economics of the market are still strong, and we believe, the current dip is just a glitch. We have provided our full analysis of the recommended region here. You can also access this by clicking on the 'Suburb Due Diligence' tab and the dropdown 'Brisbane'.
As we are working towards building a foundation for your retirement and a passive income supplemented through the property, we have to ensure the right strategy is in place to pay down your debt.
We are proposing to sell down two of your assets by approximately 2033, with the funds from the sale to sit across your offset accounts. This would offset 90% of the outstanding debt, creating a passive income via the rent received on the remaining properties. On review of your portfolio at this point in time, we will provide a timeline on the sell-down of the remaining assets as this will need to consider your current tax position, lifestyle requirements and passive income needs. For this purpose, we have modelled the sell down by 2043 to provide you with a lump sum cash injection for retirement and ownership of your family home outright.
In the strategy, we have minimised the renovation requirements and have only allowed for a granny flat build on your current property in Evatt and a structural renovation in the future, on the next property we purchase.
Given the strategy includes servicing a larger mortgage without receiving any rent, we have built a strategy around higher yielding properties, to help offset the larger mortgage repayments. We have tried to keep the total monthly outgoings to under $9k /month once all properties are purchased. That is also the reason why we have recommended the granny flat build as this will create much needed secondary income. Properties 4 & 5, are both low entry, high yielding purchases, whilst, property 6 will be a property that is purchased already with a dual income, to limit any further capital outlay.
We have modelled the purchase of your family home in 2022. This was more to do with market timing in Sydney and ensuring we are back in the Sydney market when it turns. It will also allow you the time to build up a buffer and cash surplus to cover the deposit and a safety net for the larger monthly outgoings. This property will provide you with significant capital growth over the period of ownership and will essentially underpin the portfolio. The recommendation for the purchase is to use the majority of funds held in your offset account, so given this, if we believe the market begins to move earlier, or, you want to purchase sooner, we should have the flexibility to do so.
By 2033, your family home will essentially be debt free (100% offset). And although we haven't shown it in this model, you are going to have the flexibility to purchase a bigger home when the time comes without too much difficulty. This is something we will just monitor and adjust the plan accordingly when required.
Below is a topline timeline of the strategy and when you can expect to be purchasing and renovating on this journey.
These timings are subject to change and are only indicative at this stage. As your circumstances change, markets adjust, we will need to pivot and adjust your plan accordingly
Time to get our hands dirty, lift up the bonnet and see how it all works.
These calculations are an assumption and you should consult
with your accountant and financial advisor to get a complete
understanding of your personal tax position.
You have a lot of information to digest! So, take your time to review our strategy and recommendations. We can make ourselves available at your earliest to discuss and sign off on the strategy. You should also review with your tax accountant the scenarios based on your actual tax position.
Once approved, we will commence the property search based on the agreed region recommendations.
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